Anticipating the Stock Market Crash of 1929: The View from the Floor of the Stock Exchange

In the months prior to the stock market crash of 1929, the price of a seat on the New York Stock Exchange was abnormally low. Rising stock prices and volume should have driven up seat prices during the boom of 1929; instead there were negative cumulative abnormal returns to seats of approximately 20 percent in the months just before the crash. At the same time, trading nearly ceased in the thin markets for seats on the regional exchanges. Brokers appear thus to have anticipated the October 1929 crash, although investors in the market apparently did not recognize this information.

Were banks special intermediaries in late nineteenth century America?

Banks and banking - History

California Banking in the Nineteenth Century: The Art and Method of the Bank of A. Levy

An 1890s loan book of the Bank A. Levy permits a detailed examination of the lending operations of a private bank in California during the National Banking Era (1864-1914). This period has been intensively analyzed at the macroeconomic level, but there are few microeconomic studies of banks. This unregulated bank was well integrated into national money markets and lent to a broad cross section of the community. Although the bank appeared to adhere to the real bills doctrine, it provided medium term uncollateralized financing to business. The bank priced risk carefully, offering rates equal to the lowest in the country to its best customers while charging extraordinarily high rates to borrowers deemed risky. In the absence of modern accounting, close scrutiny of borrowers' businesses and personal lives overcame the asymmetry of information between borrower and lender, enabling the bank to fulfill a special intermediary role.

The New York Stock Market in the 1920s and 1930s: Did Stock Prices Move Together Too Much?

In this paper, we re-examine the stock market of the 1920s and 1930s for evidence of a bubble, a 'fad' or 'herding' behavior by studying individual stock returns. One story often advanced for the boom of 1928 and 1929 is that it was driven by the entry into the market of largely uninformed investors, who followed the fortunes of and invested in 'favorite' stocks. The recent theoretical literature on how 'noise traders' perturb financial markets is consistent with this description. The result of this behavior would be a tendency for the favorite stocks' prices to move together more than would be predicted by their shared fundamentals. Our results suggest that there was excess comovement in returns even before the boom began, but comovement increased significantly during the boom and was a signal characteristic of the tumultuous market of the early 1930s. These results are thus consistent with the possibility that a fad or crowd psychology played a role in the rise of the market, its crash and subsequent volatility.

Was there a bubble in the 1929 Stock Market?

Standard tests find that no bubbles are present in the stock price data for the last one hundred years. In contrast., historical accounts, focusing on briefer periods, point to the stock market of 1928-1929 as a classic example of a bubble. While previous studies have restricted their attention to the joint behavior of stock prices and dividends over the course of a century, this paper uses the behavior of the premia demanded on loans collateralized by the purchase of stocks to evaluate the claim that the boom and crash of 1929 represented a bubble. We develop a model that permits us to extract an estimate of the path of the bubble and its probability of bursting in any period and demonstrate that the premium behaves as would be expected in the presence of a bubble in stock prices. We also find that our estimate of the bubble's path has explanatory power when added to the standard cointegrating regressions of stock prices and dividends, in spite of the fact that our stock price and dividend series are cointegrated.

U.S. Stock Market Crashes and Their Aftermath: Implications for Monetary Policy

This paper examines fifteen historical episodes of stock market crashes and their aftermath in the United States over the last one hundred years. Our basic conclusion from studying these episodes is that financial instability is the key problem facing monetary policy makers and not stock market crashes, even if they reflect the possible bursting of a bubble. With a focus on financial stability rather than the stock market, the response of central banks to stock market fluctuations is more likely to be optimal and maintain support for the independence of the central bank.

Who Panics During Panics? Evidence from a Nineteenth Century Savings Bank

Using records of the bank accounts of individual depositors, this paper provides a detailed microeconomic analysis of two nineteenth century banking panics. The panics of 1854 and 1857 were not characterized by an immediate mass panic of depositors and had important time dimensions. We examine depositor behavior using a hazard model. Contagion was the key factor in 1854 but it was not strong enough to create more than a local panic. In contrast, the panic of 1857 began with runs by businessmen and banking sophisticates followed by less informed depositors. Uninformed contagion may have been present, but the evidence suggests that this panic was driven by informational shocks in the face of asymmetric information about the true condition of bank portfolios.