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Financial Market Analysis Can Go Mad (in the search for irrational behaviour during the South Sea Bubble)

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  • Gary S. Shea

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Abstract

An investigation into the legal and political history of South Sea Company subscription finance shows that the subscription contracts had default options built into them, as was typically the case in eighteenth-century subscription financing. Company records and contemporary pamphlet literature show that people understood the subscription finance mechanics that were stated in law. A fair presentation of South Sea share value data also supports this view. We thus conclude that the analyses published in this Review by Dale, Johnson and Tang were irretrievably flawed and present a substantially incorrect history of the markets for South Sea shares.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/wp0508.pdf
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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200508.

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Date of creation: 15 Jul 2005
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Handle: RePEc:san:cdmawp:0508

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Keywords: South Sea Company; Royal African Company; Financial Revolution; Bubble Act; subscription shares; options markets.;

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Cited by:
  1. Rik P. & William Goetzmann & K. Rouwenhorst, 2009. "New Evidence on the First Financial Bubble," Yale School of Management Working Papers, Yale School of Management amz2542, Yale School of Management, revised 01 Nov 2009.
  2. Gary S. Shea, 2006. "Sir George Caswall vs. the Duke of Portland: Financial Contracts and Litigation in the wake of the South Sea Bubble," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 200605, Centre for Dynamic Macroeconomic Analysis.
  3. Gary S. Shea, 2007. "Arbitrage and Simple Financial Market Efficiency during the South Sea Bubble: A Comparative Study of the Royal African and South Sea Companies Subscription Share Issues," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 200716, Centre for Dynamic Macroeconomic Analysis.
  4. Campbell, Gareth, 2010. "Leveraging the British Railway Mania: Derivatives for the Individual Investor," MPRA Paper 21822, University Library of Munich, Germany.
  5. Gary S. Shea, 2011. "(Re)financing the Slave Trade with the Royal African Company in the Boom Markets of 1720," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201114, Centre for Dynamic Macroeconomic Analysis.

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