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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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  • 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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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200716.

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Date of creation: 15 Oct 2007
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Handle: RePEc:san:cdmawp:0716

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

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  1. Richard S. Dale & Johnnie E. V. Johnson & Leilei Tang, 2005. "Financial markets can go mad: evidence of irrational behaviour during the South Sea Bubble -super-1 ," Economic History Review, Economic History Society, vol. 58(2), pages 233-271, 05.
  2. Gary S. Shea, 2005. "Understanding financial derivatives during the South Sea Bubble: the case of the South Sea subscription shares," CDMA Working Paper Series 200512, Centre for Dynamic Macroeconomic Analysis.
  3. Ann M. Carlos & Jamie Brown Kruse, 1996. "The decline of the Royal African Company: fringe firms and the role of the charter," Economic History Review, Economic History Society, vol. 49(2), pages 291-313, 05.
  4. 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.
  5. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, September.
  6. 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 200508, Centre for Dynamic Macroeconomic Analysis.
  7. 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.
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