Gallery:Step 9|Step 9: History

Historical Databases and Studies

Gallery:Step 9|Step 9: History

Several different historical databases are used to study the market. One of the first was the Cowles Commission’s Common-Stock Indexes, spearheaded by Alfred Cowles. The Common-Stock Indexes were created in order to portray the average experience of investors who invested in those securities from 1871 to 1938. The compilation of the data was no easy task. Remember, it was assembled without the help of modern computer technology. The data, which was published in August 1938, was the product of years of research and data collection. According to Cowles, more than 1.5 million worksheet entries were made (and we’re not talking about Excel worksheets!).

The premier source of historical data used by the academic and corporate community comes from the Center for Research in Security Prices (CRSP). CRSP, which is housed at the University of Chicago Booth School of Business was established in 1960 with the goal of building and maintaining historical databases for stock (NASDAQ, AMEX, NYSE), indexes, bond, and mutual fund securities. Part of the goal of the center was to unite the common interests between the academic and financial communities by providing a better understanding of the operations of the market. Since computer technology was in its infancy, no machine-readable, historical stock data files were in existence at the time CRSP was launched. Initially, CRSP was formed to accurately measure the returns from investing in common stocks listed on the New York Stock Exchange for the period 1926 to 1960. It took the researchers at CRSP four years to complete this initial study. Since its inception CRSP has developed a host of new data resources. The data housed at CRSP is used extensively for financial, economic, and accounting research. Currently, Eugene Fama, a well respected professor of finance at the Graduate School of Business at the University of Chicago and a director at DFA, is the chairman of CRSP. DFA bases several of its investment products on Fama’s findings from that database.

The prestigious University of Chicago publication, The Journal of Business, caused the academic equivalent of an earthquake in an article published in January 1964 titled “Rates of Return on Investments in Common Stocks.” In the article, James Lorie and Lawrence Fisher, two business professors at the school, made the first comprehensive measurement of the performance of all common stocks listed on the New York Stock Exchange from 1926 through 1960. They obtained and compiled their data from CRSP.

The study presented a mind-boggling accumulation of statistical calculations. Both academic researchers and investment professionals were astonished at Fisher and Lorie’s discoveries. For instance, the study showed that an investor who invested $1,000 in the stock market in 1926, reinvested all dividends, paid no taxes, and remained fully invested until the end of 1960 would have accumulated nearly $30,000 or a gain of about 9% a year. In light of the fact that many investors in 1964 still had vivid memories of the Great Depression and its stock market crash, 9% a year was a great deal of money. In addition, this return was far greater than the amount an investor would have earned from bonds or savings bank deposits during that time period. For the first time, investors had comprehensive historical investment data that gave them a sense of how common stocks performed compared to other investments.

Roger G. Ibbotson and Rex A. Sinquefield, two graduates of the business school at the University of Chicago, released a study that was published in The Journal of Business titled “Stocks, Bonds, Bills and Inflation.” The two researchers were the first to compile and present in an organized way historical investment data that covered not only stocks, but bonds as well. They even reported data on inflation. As was the case with Lorie and Fisher’s study, their data went back to 1926, and was obtained from CRSP. The Ibbotson-Sinquefield data, now updated annually in what has come to be known as the “Stocks, Bonds, Bills and Inflation (SBBI) Yearbook,” is widely used in the investment world.

In 1990, G. William Schwert of the University of Rochester published an article in The Journal of Business titled “Indexes of U.S. Stock Prices from 1802 to 1987.” Schwert pointed out that the data compiled by CRSP launched an explosion of research in finance in the 1960s to 1970s. However, notes Schwert, a major drawback of the CRSP database is that it starts in 1926, a time right before the Great Depression. Consequently, the behavior of the stock market and stock returns was unusual in the 1929 to 1939 decade. Therefore, an empirical study based on the data could be “suspect.” So, Schwert set his sights on pre-CRSP stock return data. His article compares and contrasts all of the major indexes of stock prices or returns that were available monthly from 1802 to 1925 or daily from 1885 to 1962. The outcome of the comparison is a series of monthly stock portfolio returns from 1802 to 1925, and daily returns from 1885 to 1962. This important study included many refinements of the concept of “stitching” together several different index data series to obtain a longer term prospective.