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Riding the South Sea Bubble

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Author Info
Temin, Peter
Voth, Hans-Joachim

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Abstract

The efficient markets hypothesis implies that, in the presence of rational investors, bubbles cannot develop. We analyse the trading behaviour of a sophisticated investor, a London goldsmith bank, during the South Sea bubble in 1720. The bank believed the stock to be overvalued, yet found it profitable not to attack the bubble. Detailed examination of daily transactions in the London stock market shows that ‘riding the bubble’ was a highly profitable strategy. These findings lend support to recent theoretical work arguing that predictable investor sentiment may prevent rational investors from attacking a bubble.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4221.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4221

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Related research
Keywords: bubbles; investor sentiment; south sea company; speculation;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Milo Bianchi & Philippe Jehiel, 2008. "Bubbles and crashes with partially sophisticated investors," PSE Working Papers 2008-62, PSE (Ecole normale supérieure). [Downloadable!]
  2. Gadi Barlevy, 2008. "A leverage-based model of speculative bubbles," Working Paper Series WP-08-01, Federal Reserve Bank of Chicago. [Downloadable!]
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    Other versions:
  5. Robin Greenwood & Stefan Nagel, 2008. "Inexperienced Investors and Bubbles," NBER Working Papers 14111, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Korkut A. ErtŸrk, 2005. "Macroeconomics of Speculation," Economics Working Paper Archive wp_424, Levy Economics Institute, The. [Downloadable!]
  7. Korkut Erturk, 2005. "Economic Volatility and Capital Account Liberalization in Emerging Countries," International Review of Applied Economics, Taylor and Francis Journals, vol. 19(4), pages 399-417, October. [Downloadable!] (restricted)
  8. Korkut Erturk, 2005. "Speculation, Liquidity Preference and Monetary Circulation," Working Paper Series, Department of Economics, University of Utah 2005_12, University of Utah, Department of Economics.
    Other versions:
  9. Korkut A. Erturk, 2006. "On the Minskyan Business Cycle," Economics Working Paper Archive wp_474, Levy Economics Institute, The. [Downloadable!]
  10. Noussair, C.N. & Powell, O.R., 2008. "Peaks and Valleys: Experimental Asset Markets With Non-Monotonic Fundamentals," Discussion Paper 2008-49, Tilburg University, Center for Economic Research. [Downloadable!]
  11. Schmeling, Maik, 2006. "Institutional and Individual Sentiment: Smart Money and Noise Trader Risk," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-337, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
    Other versions:
  12. Korkut Erturk, 2005. "Macroeconomics of Speculation," Working Paper Series, Department of Economics, University of Utah 2005_02, University of Utah, Department of Economics. [Downloadable!]
    Other versions:
  13. John Conlon, 2005. "Should Central Banks Burst Bubbles?," Game Theory and Information 0508007, EconWPA. [Downloadable!]
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