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Understanding financial derivatives during the South Sea Bubble: the case of the South Sea subscription shares

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  • Gary S. Shea

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Abstract

South Sea Company subscription shares were compound call options on the firm’s own original shares. From the description of shares found in 6 Geo. 1, c.4, a theory of their pricing is developed. A method for computing subscription share values is also developed. Calculated theoretical values for subscription shares are compared to the shares’ historical values and a close correspondence between the two is demonstrated. The pricing of the subscriptions appears to have been quite rational and explainable using simple financial economic theory.

Suggested Citation

  • 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.
  • Handle: RePEc:san:cdmawp:0512
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    File URL: http://www.st-andrews.ac.uk/~wwwecon/CDMA/papers/wp0512.pdf
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    References listed on IDEAS

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    1. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
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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. Turner, John D., 2014. "Financial history and financial economics," QUCEH Working Paper Series 14-03, Queen's University Belfast, Queen's University Centre for Economic History.
    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. Ernst Juerg Weber, 2008. "A Short History of Derivative Security Markets," Economics Discussion / Working Papers 08-10, The University of Western Australia, Department of Economics.
    6. Awrey, Dan, 2013. "Toward a supply-side theory of financial innovation," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 401-419.
    7. Campbell, Gareth & Turner, John, 2010. "‘The Greatest Bubble in History’: Stock Prices during the British Railway Mania," MPRA Paper 21820, University Library of Munich, Germany.

    More about this item

    Keywords

    South Sea Company; financial revolution; bubble act; compound options; partly-paid shares.;

    JEL classification:

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

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