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New Evidence on the First Financial Bubble

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Author Info
Rik G.P. Frehen
William N. Goetzmann
K. Geert Rouwenhorst

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Abstract

The first global financial bubble in stock prices occurred 1720 in Paris, London and the Netherlands. Explanations for these linked bubbles primarily focus on the irrationality of investor speculation and the corresponding stock price behavior of two large firms: the South Sea Company in Great Britain and the Mississippi Company in France. In this paper we examine a broad cross‐section of security price data to evaluate the causes of the bubbles. Using newly collected stock prices for British and Dutch firms in 1720, we find evidence against indiscriminate irrational exuberance and evidence in favor of speculation about two factors: the Atlantic trade and the incorporation of insurance companies. We study the role of innovation in the insurance market by examining market betas and volatilities of new insurance company shares, like (Pastor & Veronesi, Technological Revolutions and Stock Prices, 2009). We find strong evidence for a revolution in the insurance business in 1720. Our findings are consistent with the hypothesis that financial bubbles require a plausible story to justify investor optimism.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15332.

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Date of creation: Sep 2009
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Handle: RePEc:nbr:nberwo:15332

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Find related papers by JEL classification:
G01 - Financial Economics - - General - - - Financial Crises
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
N13 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - Europe: Pre-1913
N15 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - Asia including Middle East

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  1. Peter Temin & Joachim Voth, 2004. "Riding the South Sea Bubble," Economics Working Papers 861, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  2. Ann Carlos & Karen Maguire & Larry Neal, 2006. "Financial acumen, women speculators, and the Royal African company during the South Sea bubble," Accounting, Business and Financial History, Taylor and Francis Journals, vol. 16(2), pages 219-243, July. [Downloadable!] (restricted)
  3. 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. [Downloadable!]
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