Evidence Against the Market Bubble Story

From: Robin Hanson (rhanson@gmu.edu)
Date: Tue Jun 13 2000 - 12:37:23 MDT

I once here cited analysis by Robert Shiller that suggested
the current stock market was in a bubble. However, I just came
across relevant analysis by J. Bradford Delong, who I have other
reasons for respecting. He finds that long term fluctuations
are probably rational, while short term ones can be irrational.

"Why Does the Stock Market Fluctuate?"
Robert B. Barsky, J. Bradford De Long
Quarterly Journal of Economics,
Vol. 108, No. 2. (May, 1993), pp. 291-311.


Major long-run swings in the U. S. stock market over the past century are
broadly consistent with a model driven by changes in current and expected
future dividends in which investors must estimate the time-varying long-run
dividend growth rate. Such an estimated long-run growth rate resembles a
long distributed lag on past dividend growth, and is highly correlated with
the level of dividends. Prices therefore respond more than proportionately
to long-run movements in dividends. The time-varying component of dividend
growth need not be detectable in the dividend data for it to have large
effects on stock prices

"The Stock Market Bubble of 1929: Evidence from Closed-end Mutual Funds"
J. Bradford De Long, Andrei Shleifer
Journal of Economic History,
Vol. 51, No. 3. (Sep., 1991), pp. 675-700.


Economists directly observe warranted "fundamental" values in only a few
cases. One is that of closed-end mutual funds: their fundamental value is
simply the current market value of the securities that make up their
portfolios. We use the difference between prices and net asset values of
closed-end mutual funds at the end of the 1920s to estimate the degree to
which the stock market was overvalued on the eve of the 1929 crash. We
conclude that the stocks making up the S & P composite were priced at least
30 percent above fundamentals in late summer, 1929.

Robin Hanson rhanson@gmu.edu http://hanson.gmu.edu
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030
703-993-2326 FAX: 703-993-2323

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