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Understanding financial derivatives during the South Sea Bubble: the case of the South Sea subscription shares

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  • Gary S. Shea

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Abstract

South Sea Company subscription shares were compound call options on the firm’s own original shares. From the description of shares found in 6 Geo. 1, c.4, a theory of their pricing is developed. A method for computing subscription share values is also developed. Calculated theoretical values for subscription shares are compared to the shares’ historical values and a close correspondence between the two is demonstrated. The pricing of the subscriptions appears to have been quite rational and explainable using simple financial economic theory.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/wp0512.pdf
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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0512.

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Date of creation: Dec 2005
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Handle: RePEc:san:cdmawp:0512

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Keywords: South Sea Company; financial revolution; bubble act; compound options; partly-paid shares.;

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  1. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
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Cited by:
  1. Ernst Juerg Weber, 2008. "A Short History of Derivative Security Markets," Economics Discussion / Working Papers 08-10, The University of Western Australia, Department of Economics.
  2. Campbell, Gareth, 2010. "Leveraging the British Railway Mania: Derivatives for the Individual Investor," MPRA Paper 21822, University Library of Munich, Germany.
  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 0716, Centre for Dynamic Macroeconomic Analysis.
  4. Gary S. Shea, 2011. " (Re)financing the Slave Trade with the Royal African Company in the Boom Markets of 1720," CDMA Working Paper Series 1114, Centre for Dynamic Macroeconomic Analysis.
  5. Campbell, Gareth & Turner, John, 2010. "‘The Greatest Bubble in History’: Stock Prices during the British Railway Mania," MPRA Paper 21820, University Library of Munich, Germany.

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