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Riding the South Sea Bubble

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Author Info
Peter Temin
Joachim Voth ()

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Abstract

This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare's Bank, a fledgling West End London banker, knew that a bubble was in progress and nonetheless invested in the stock; it was profitable to "ride the bubble." Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by institutional factors such as restrictions on short sales or agency problems. Instead, this study demonstrates that predictable investor sentiment can prevent attacks on a bubble; rational investors may only attack when some coordinating event promotes joint action.

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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 861.

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Date of creation: Dec 2004
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Handle: RePEc:upf:upfgen:861

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Related research
Keywords: Efficient Market Hypothesis; Bubbles; Crashes; Synchronization Risk; Investor Sentiment; South Sea Bubble; Market Timing; Limits to Arbitrage;

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Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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    Other versions:
  6. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  9. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
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    Other versions:
  19. Charles M. Jones & Owen A. Lamont, 2001. "Short Sale Constraints and Stock Returns," NBER Working Papers 8494, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  20. Detemple, Jerome & Murthy, Shashidhar, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(4), pages 1133-74.
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    Other versions:
  22. Joseph Chen & Harrison Hong & Jeremy C. Stein, 2001. "Breadth of Ownership and Stock Returns," NBER Working Papers 8151, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, vol. 58(3), pages 1113-1138, 06. [Downloadable!] (restricted)
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    Other versions:
  25. Roger Koenker & Kevin F. Hallock, 2001. "Quantile Regression," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 143-156, Fall. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Milo Bianchi & Philippe Jehiel, 2008. "Bubbles and crashes with partially sophisticated investors," PSE Working Papers 2008-62, PSE (Ecole normale supérieure). [Downloadable!]
  2. Gadi Barlevy, 2008. "A leverage-based model of speculative bubbles," Working Paper Series WP-08-01, Federal Reserve Bank of Chicago. [Downloadable!]
  3. Korkut Erturk, 2005. "Speculation, Liquidity Preference and Monetary Circulation," Working Paper Series, Department of Economics, University of Utah 2005_12, University of Utah, Department of Economics.
    Other versions:
  4. Korkut A. Erturk, 2006. "On the Minskyan Business Cycle," Economics Working Paper Archive wp_474, Levy Economics Institute, The. [Downloadable!]
  5. Schmeling, Maik, 2006. "Institutional and Individual Sentiment: Smart Money and Noise Trader Risk," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-337, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
    Other versions:
  6. Korkut Erturk, 2005. "Macroeconomics of Speculation," Working Paper Series, Department of Economics, University of Utah 2005_02, University of Utah, Department of Economics. [Downloadable!]
    Other versions:
  7. John Conlon, 2005. "Should Central Banks Burst Bubbles?," Game Theory and Information 0508007, EconWPA. [Downloadable!]
  8. Milo Bianchi & Philippe Jehiel, 2008. "Speculative Bubbles without Stupid Investors," Levine's Bibliography 122247000000002180, UCLA Department of Economics. [Downloadable!]
  9. Kai, Guo & Conlon, John R., 2007. "Why Bubble-Bursting Is Unpredictable: Welfare Effects Of Anti-Bubble Policy When Central Banks Make Mistakes," MPRA Paper 5927, University Library of Munich, Germany. [Downloadable!]
  10. Rik G.P. Frehen & William N. Goetzmann & K. Geert Rouwenhorst, 2009. "New Evidence on the First Financial Bubble," NBER Working Papers 15332, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Ernst Fehr & Jean-Robert Tyran, 2005. "Individual Irrationality and Aggregate Outcomes," Discussion Papers 05-09, University of Copenhagen. Department of Economics. [Downloadable!]
    Other versions:
  12. Robin Greenwood & Stefan Nagel, 2008. "Inexperienced Investors and Bubbles," NBER Working Papers 14111, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Korkut A. ErtŸrk, 2005. "Macroeconomics of Speculation," Economics Working Paper Archive wp_424, Levy Economics Institute, The. [Downloadable!]
  14. Korkut Erturk, 2005. "Economic Volatility and Capital Account Liberalization in Emerging Countries," International Review of Applied Economics, Taylor and Francis Journals, vol. 19(4), pages 399-417, October. [Downloadable!] (restricted)
  15. Noussair, C.N. & Powell, O.R., 2008. "Peaks and Valleys: Experimental Asset Markets With Non-Monotonic Fundamentals," Discussion Paper 2008-49, Tilburg University, Center for Economic Research. [Downloadable!]
  16. Peter Temin & Joachim Voth, 2004. "Credit Rationing and Crowding Out During the Industrial Revolution: Evidence from Hoare's Bank, 1702-1862," Economics Working Papers 859, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2005. [Downloadable!]
    Other versions:
  17. John R. Conlon, 2008. "Should Central Banks Burst Bubbles? Some Microeconomic Issues," Levine's Working Paper Archive 122247000000002330, David K. Levine. [Downloadable!]
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