Efficient Derivative Pricing and Sequestered Capital: The Case of Investment Trust Pricing in 1929

57 Pages Posted: 20 Aug 2018 Last revised: 13 Jan 2020

See all articles by James McClure

James McClure

Ball State University - Department of Economics

David Chandler Thomas

Ball State University - Department of Economics

Steven Horwitz

Ball State University - Department of Economics

Date Written: November 1, 2019

Abstract

The efficient market hypothesis implies that the price of a financial derivative should mirror the value of its underlying asset(s). This model is used to reconsider an historic anomaly—the large, allegedly irrational, premia on investment trusts that preceded the 1929 crash. First, we reexamine evidence—highly cited for decades—alleging anomalous premia on portfolio-publishing trusts preceding the crash. Our assessment, based on current information-gathering capabilities, shows no evidence of anomalous premia in the cases considered. Secondly, we test our model on a data set of over 3,000 price observations, using regression discontinuity in time (RDiT) designs. As expected, the prices of blind trusts quickly corrected with the disclosure of their underlying portfolios. Our findings suggest that sequestered capital, rather than irrational exuberance, was primarily responsible for the premia on trusts in 1929.

Keywords: Efficient Market Hypothesis, Financial Derivative, Sequestered Capital, Closed-end Mutual Fund, Investment Trust, 1929 Stock Market Crash, Regression Discontinuity in Time Design (RDiT)

JEL Classification: G01, G12, G14

Suggested Citation

McClure, James and Thomas, David and Horwitz, Steven, Efficient Derivative Pricing and Sequestered Capital: The Case of Investment Trust Pricing in 1929 (November 1, 2019). Available at SSRN: https://ssrn.com/abstract=3224781 or http://dx.doi.org/10.2139/ssrn.3224781

James McClure

Ball State University - Department of Economics ( email )

Muncie, IN 47306-0340
United States

David Thomas (Contact Author)

Ball State University - Department of Economics ( email )

Muncie, IN 47306-0340
United States
408-859-8185 (Phone)

HOME PAGE: http://www.davidchandlerthomas.com

Steven Horwitz

Ball State University - Department of Economics ( email )

Department of Economics
Ball State University
Muncie, IN 47306
United States
765 285 5384 (Phone)

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