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Financial Market Analysis Can Go Mad (in the search for irrational behaviour during the South Sea Bubble)

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  • Gary S. Shea

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Abstract

An investigation into the legal and political history of South Sea Company subscription finance shows that the subscription contracts had default options built into them, as was typically the case in eighteenth-century subscription financing. Company records and contemporary pamphlet literature show that people understood the subscription finance mechanics that were stated in law. A fair presentation of South Sea share value data also supports this view. We thus conclude that the analyses published in this Review by Dale, Johnson and Tang were irretrievably flawed and present a substantially incorrect history of the markets for South Sea shares.

Suggested Citation

  • 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.
  • Handle: RePEc:san:cdmawp:0508
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    File URL: http://www.st-andrews.ac.uk/~wwwecon/CDMA/papers/wp0508.pdf
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    Cited by:

    1. Campbell, Gareth, 2010. "Leveraging the British Railway Mania: Derivatives for the Individual Investor," MPRA Paper 21822, University Library of Munich, Germany.
    2. 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.
    3. Gary S. Shea, 2007. "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," CDMA Working Paper Series 200716, Centre for Dynamic Macroeconomic Analysis.
    4. Gary S. Shea, 2011. "(Re)financing the Slave Trade with the Royal African Company in the Boom Markets of 1720," CDMA Working Paper Series 201114, Centre for Dynamic Macroeconomic Analysis.
    5. Gary S. Shea, 2006. "Sir George Caswall vs. the Duke of Portland: Financial Contracts and Litigation in the wake of the South Sea Bubble," CDMA Working Paper Series 200605, Centre for Dynamic Macroeconomic Analysis.

    More about this item

    Keywords

    South Sea Company; Royal African Company; Financial Revolution; Bubble Act; subscription shares; options markets.;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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