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New evidence on the first financial bubble

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  • Frehen, Rik G.P.
  • Goetzmann, William N.
  • Geert Rouwenhorst, K.

Abstract

The Mississippi Bubble, South Sea Bubble and the Dutch Windhandel of 1720 together represent the world's first global financial bubble. We hand-collect cross-sectional price data and investor account data from 1720 to test theories about market bubbles. Our tests suggest that innovation was a key driver of bubble expectations. We present evidence against the currently prevailing debt-for-equity conversion hypothesis and relate stock returns to innovations in Atlantic trade and insurance. We find evidence consistent with the innovation-driven bubble dynamics documented by Pastor and Veronesi (2009) for new economy stocks. Our evidence seems inconsistent with clientele-based theories that emphasize bubble-riding and short-sales restrictions.

Suggested Citation

  • Frehen, Rik G.P. & Goetzmann, William N. & Geert Rouwenhorst, K., 2013. "New evidence on the first financial bubble," Journal of Financial Economics, Elsevier, vol. 108(3), pages 585-607.
    • Handle: RePEc:eee:jfinec:v:108:y:2013:i:3:p:585-607
    DOI: 10.1016/j.jfineco.2012.12.008
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    More about this item

    Keywords

    Bubbles; Innovation; Clientele theory; Bubble riding; South Sea Bubble;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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