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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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 108 (2013)
Issue (Month): 3 ()
Pages: 585-607

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Handle: RePEc:eee:jfinec:v:108:y:2013:i:3:p:585-607

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Bubbles; Innovation; Clientele theory; Bubble riding; South Sea Bubble;

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References

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  1. Peter Temin & Hans-Joachim Voth, 2003. "Riding the South Sea Bubble," Working Papers 91, Barcelona Graduate School of Economics.
  2. Gary S. Shea, 2007. "Financial market analysis can go mad (in the search for irrational behaviour during the South Sea Bubble) -super-1," Economic History Review, Economic History Society, vol. 60(4), pages 742-765, November.
  3. Pástor, Luboš & Veronesi, Pietro, 2004. "Was There A Nasdaq Bubble in the Late 1990s?," CEPR Discussion Papers 4485, C.E.P.R. Discussion Papers.
  4. Christine Macleod, 1986. "The 1690s Patents Boom: Invention or Stock-Jobbing?," Economic History Review, Economic History Society, vol. 39(4), pages 549-571, November.
  5. Bart Hobijn & Boyan Jovanovic, 2000. "The Information Technology Revolution and the Stock Market: Evidence," NBER Working Papers 7684, National Bureau of Economic Research, Inc.
  6. Luboš Pástor & Pietro Veronesi, 2009. "Technological Revolutions and Stock Prices," American Economic Review, American Economic Association, vol. 99(4), pages 1451-83, September.
  7. Schwert, G.W., 1989. "Stock Volatility And The Crash Of '87," Papers 89-01, Rochester, Business - General.
  8. Kingston, Christopher, 2007. "Marine Insurance in Britain and America, 1720 1844: A Comparative Institutional Analysis," The Journal of Economic History, Cambridge University Press, vol. 67(02), pages 379-409, June.
  9. Markus K. Brunnermeier & Stefan Nagel, 2004. "Hedge Funds and the Technology Bubble," Journal of Finance, American Finance Association, vol. 59(5), pages 2013-2040, October.
  10. Tom Nicholas, 2008. "Does Innovation Cause Stock Market Runups? Evidence from the Great Crash," American Economic Review, American Economic Association, vol. 98(4), pages 1370-96, September.
  11. Gary S. Shea, 2005. "Financial Market Analysis Can Go Mad (in the search for irrational behaviour during the South Sea Bubble)," CDMA Working Paper Series 200508, Centre for Dynamic Macroeconomic Analysis.
  12. Ann Carlos & Karen Maguire & Larry Neal, 2006. "Financial acumen, women speculators, and the Royal African company during the South Sea bubble," Accounting History Review, Taylor & Francis Journals, vol. 16(2), pages 219-243.
  13. Harris, Ron, 1994. "The Bubble Act: Its Passage and Its Effects on Business Organization," The Journal of Economic History, Cambridge University Press, vol. 54(03), pages 610-627, September.
  14. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
  15. Neal,Larry, 1994. "The Rise of Financial Capitalism," Cambridge Books, Cambridge University Press, number 9780521457385.
  16. John M. Griffin & Jeffrey H. Harris & Tao Shu & Selim Topaloglu, 2011. "Who Drove and Burst the Tech Bubble?," Journal of Finance, American Finance Association, vol. 66(4), pages 1251-1290, 08.
  17. Carlos, Ann M. & Moyen, Nathalie & Hill, Jonathan, 2002. "Royal African Company Share Prices during the South Sea Bubble," Explorations in Economic History, Elsevier, vol. 39(1), pages 61-87, January.
  18. Thorpe, David P. & Holland, Burt, 2000. "Some multiple comparison procedures for variances from non-normal populations," Computational Statistics & Data Analysis, Elsevier, vol. 35(2), pages 171-199, December.
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Cited by:
  1. Madarász, Aladár, 2011. "Buborékok és legendák. Válságok és válságmagyarázatok - II/2. rész. A Déltengeri Társaság
    [Bubbles and myths, crises and explanations II/2: the South Sea bubble]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1001-1028.
  2. Peter Koudijs, 2013. "The boats that did not sail: Asset Price Volatility and Market Efficiency in a Natural Experiment," NBER Working Papers 18831, National Bureau of Economic Research, Inc.

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