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New Evidence on the First Financial Bubble

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

The first global financial bubble in stock prices occurred 1720 in Paris, London and the Netherlands. Explanations for these linked bubbles primarily focus on the irrationality of investor speculation and the corresponding stock price behavior of two large firms: the South Sea Company in Great Britain and the Mississippi Company in France. In this paper we examine a broad cross‐section of security price data to evaluate the causes of the bubbles. Using newly collected stock prices for British and Dutch firms in 1720, we find evidence against indiscriminate irrational exuberance and evidence in favor of speculation about two factors: the Atlantic trade and the incorporation of insurance companies. We study the role of innovation in the insurance market by examining market betas and volatilities of new insurance company shares, like (Pastor & Veronesi, Technological Revolutions and Stock Prices, 2009). We find strong evidence for a revolution in the insurance business in 1720. Our findings are consistent with the hypothesis that financial bubbles require a plausible story to justify investor optimism.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15332.

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Date of creation: Sep 2009
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Publication status: published as Frehen, Rik G.P. & Goetzmann, William N. & Geert Rouwenhorst, K., 2013. "New evidence on the first financial bubble," Journal of Financial Economics, Elsevier, vol. 108(3), pages 585-607.
Handle: RePEc:nbr:nberwo:15332
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  1. G. William Schwert, 1989. "Stock Volatility and the Crash of '87," NBER Working Papers 2954, National Bureau of Economic Research, Inc.
  2. 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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