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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

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Author Info
Gary S. Shea ()

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Abstract

Subscription shares of the early 18th century were early examples of what today would be called innovated securities. Either by intent or happenstance, they served to overcome imperfections in the capital markets of the day. Not all such securities were, however, alike. The prominent examples of the subscription shares of the South Sea Company and the Royal African Company in 1720 were quiet different in their design and the corporate financial policies they were intended to aid. The historical literature emphasises the importance of irrational pricing behaviour during the South Sea Bubble, yet it is remarkable that in the financial markets of 1720 the relative values of subscription shares are easily understandable using standard financial theory.

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Publisher Info
Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0716.

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Date of creation: Oct 2007
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Handle: RePEc:san:cdmawp:0716

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Related research
Keywords: Royal African Company; South Sea Company; Financial Revolution; subscription shares; call options; derivatives; instalment receipts; innovated securities.;

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

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. Gary S. Shea, 2005. " Financial Market Analysis Can Go Mad (in the search for irrational behaviour during the South Sea Bubble)," CDMA Working Paper Series 0508, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  2. Charupat, Narat & Prisman, Eliezer Z., 2004. "An essay on financial innovation: The case of instalment receipts," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 129-156, January. [Downloadable!] (restricted)
  3. Carlos, Ann M. & Moyen, Nathalie & Hill, Jonathan, 2002. "Royal African Company Share Prices during the South Sea Bubble," Explorations in Economic History, Elsevier, vol. 39(1), pages 61-87, January. [Downloadable!] (restricted)
  4. Gary S. Shea, 2005. " Understanding financial derivatives during the South Sea Bubble: the case of the South Sea subscription shares," CDMA Working Paper Series 0512, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
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