1929 Stock Movements: Intangibles or Animal Spirits?

Cyclotronic Readings of Animal Spirit Ectoplasm Levels and Real Effects on Stock Price Fluctuation.
By: J. Antonio Montecino and R. Kalev Raudsepp-Hearne

ABSTRACT:

DeLong and Shleifer (1991) argue that stock market prices in 1929, driven by irrational investor sentiment, were overvalued by as much as 30%. However, in recent years the literature has converged on a new approach of considering the impact of "intangibles" on stock valuations. McGratten and Prescott (2004), for instance, conclude that once the value of intangible assets are taken into consideration 1929 stock prices appear, if anything, undervalued. However, McGratten and Prescott, disgracefully, failed to directly measure intangibles. Building up on their work, Nicholas (2005) employs a sophisticated methodology to directly measure intangibles with the added dimension of time(!). However, despite strong evidence that stock market prices did reflect changing fundamentals driven by intangibles, no scholar to this date has attempted to empirically observe what Keynes referred to as the market's pervasive "animal spirits."

We propose a new approach to settle this debate once and for all: to directly measure the "animal spirits" present in the 1929 stock market. Following the seminal work of Dr. Peter Venkman and Dr. Egon Spengler (see Ghostbusters, 1984 and Ghostbusters 2, 1989), this paper sets out to document the fluctuations of animal spirits responsible for the 1929 stock market boom and subsequent collapse. Adapting Venkman et al.'s methodology, cyclotron readings of 1929 spirit levels reveal conclusive evidence that stock market prices were not being driven by fundamentals. In fact, our analysis reveals a strong positive co-movement between ectoplasm levels and stock market prices.

A cyclotron reader uses similar technology to a proton collider. Protons are accelerated to near the speed of light, causing electromagnetic field fluctuations that capture the perturbations caused by the animal spirit's ectoplasm. As the cyclotron can only observe absolute values of ectoplasm levels, it cannot directly determine whether an animal spirit in question is positive or negative. We control for this measurement problem by instrumenting Slimer's reactions to the presence of positive or negative spirits. It is also important to control for the presence of positive ectoplasm externalities, which would significantly bias the results (like crazy).

Our results show that in the stock market peak in September, 1929, positive ectoplasmic fluctuations increased by 3.62 standard deviation points. Similarly, during the subsequent crash we document a strong, statistically significant and robust reversal of the ectoplasmic polarity. We show using our data that stock market reactions are indeed slightly lagged behind major ectoplasmic events, which allow us to identify a causal relationship between animal spirits and stock prices. We conclude by estimating the ectoplasmic coefficient of lag and suggesting avenues for further research.