They are found in the capital city of Iron Myre. Grayson, Drake and Armen first saw a Ghost of a Zombie-Pigman when they were trying to find The Imperial Forge. They were all surprised and said a few things before Grayson hit it and it started coming for him. He said "Oh God, Oh God, Oh God!" and was able to kill it with his sword. Another ghost appeared outside a house and was the ghost of a dog. It spooked Drake and Grayson, but Armen somehow felt touched. "Oh my God, no way!" he said, then he asked "Can I pet you?" and then a Herobrine Headache occurred and the dog vanished from sight and was never to be seen again.
"Is it...killable?" — Grayson before attempting to hit it
"Please tell me ghosts aren't real, please tell me ghosts aren't real, please!" — Drake in his encounter with a Ghost Wolf