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

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Author Info
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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Publisher 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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Related research
Keywords: South Sea Company; financial revolution; bubble act; compound options; partly-paid shares.;

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Find related papers by JEL classification:
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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References listed on IDEAS
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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. [Downloadable!] (restricted)
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Cited by:
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  1. 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. [Downloadable!]
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This page was last updated on 2009-11-25.


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