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New evidence on the first financial bubble

  • Frehen, Rik G.P.
  • Goetzmann, William N.
  • Geert Rouwenhorst, K.

The Mississippi Bubble, South Sea Bubble and the Dutch Windhandel of 1720 together represent the world's first global financial bubble. We hand-collect cross-sectional price data and investor account data from 1720 to test theories about market bubbles. Our tests suggest that innovation was a key driver of bubble expectations. We present evidence against the currently prevailing debt-for-equity conversion hypothesis and relate stock returns to innovations in Atlantic trade and insurance. We find evidence consistent with the innovation-driven bubble dynamics documented by Pastor and Veronesi (2009) for new economy stocks. Our evidence seems inconsistent with clientele-based theories that emphasize bubble-riding and short-sales restrictions.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 108 (2013)
Issue (Month): 3 ()
Pages: 585-607

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Handle: RePEc:eee:jfinec:v:108:y:2013:i:3:p:585-607
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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  1. Bart Hobijn & Boyan Jovanovic, 2001. "The Information-Technology Revolution and the Stock Market: Evidence," American Economic Review, American Economic Association, vol. 91(5), pages 1203-1220, December.
  2. Lubos Pastor & Pietro Veronesi, 2004. "Was There a Nasdaq Bubble in the Late 1990s?," NBER Working Papers 10581, National Bureau of Economic Research, Inc.
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  15. repec:cup:cbooks:9780521457385 is not listed on IDEAS
  16. Ann Carlos & Karen Maguire & Larry Neal, 2006. "Financial acumen, women speculators, and the Royal African company during the South Sea bubble," Accounting History Review, Taylor & Francis Journals, vol. 16(2), pages 219-243.
  17. Gary S. Shea, 2007. "Financial market analysis can go mad (in the search for irrational behaviour during the South Sea Bubble) -super-1," Economic History Review, Economic History Society, vol. 60(4), pages 742-765, November.
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