tailieunhanh - THE STOCK MARKET CRASH OF 1929:IRVING FISHER WAS RIGHT!

Over the past few decades, research in nancial economics has taken a high e¤ort to increase the understanding of the volatility patterns of stock market returns. Indeed, good knowledge of return volatility is crucial for portfolio choice, risk management and derivatives asset pricing. Perhaps the most robust empirical regularity of stock return volatility is volatility clustering. As rst noted by Mandelbrot (1963) when referring to stock market returns, "large changes tend to be followed by large changes, of either sign, and small changes tend to be followed by small changes". This persistence in volatility lead to the development of GARCH models by Engle (1982) and Bollerslev (1986). | NBER WORKING PAPER SERIES THE STOCK MARKET CRASH OF 1929 IRVING FISHER WAS RIGHT Ellen R. McGrattan Edward C. Prescott Working Paper 8622 http papers w8622 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 December 2001 Prescott thanks the National Science Foundation for financial support. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research the Federal Reserve Bank of Minneapolis or the Federal Reserve System. 2001 by Ellen R. McGrattan and Edward C. Prescott. All rights reserved. Short sections of text not to exceed two paragraphs may be quoted without explicit permission provided that full credit including notice is given to the source. The Stock Market Crash of 1929 Irving Fisher Was Right Ellen R. McGrattan and Edward C. Prescott NBER Working Paper No. 8622 December 2001 JEL No. E62 G12 N22 ABSTRACT In the fall of 1929 the market value of all shares listed on the New York Stock Exchange fell by 30 percent. Many analysts then and now take the view that stocks were then overvalued and the stock market was in need of a correction. Irving Fisher argued that the fundamentals were strong and the stock market was undervalued. In this paper we estimate the fundamental value of corporate equity in 1929 using data on stocks of productive capital and tax rates as in McGrattan and Prescott 2000 2001 and compare it to actual stock valuations. We find that the stock market in 1929 did not crash because the market was overvalued. In fact the evidence strongly suggests that stocks were undervalued even at their 1929 peak. Ellen R. McGrattan Research Department Federal Reserve Bank of Minneapolis 90 Hennepin Avenue Minneapolis MN 55480 and NbEr 612 204-5523 erm@ Edward C. Prescott Department of Economics University of Minnesota 271 19th Avenue South Minneapolis MN 55455 and NbEr 612 204-5520 prescott@ 1. Introduction On October 22 .