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http://ssrn.com/abstract=1371007
 
 

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New Evidence on the First Financial Bubble


Rik Frehen


Tilburg University - Department of Finance

William N. Goetzmann


Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

K. Geert Rouwenhorst


Yale School of Management - International Center for Finance

July 27, 2012

Yale ICF Working Paper No. 09-04

Abstract:     
The series of events in 1720 called the Mississippi Bubble, South Sea Bubble and the Dutch Windhandel represent the first and by some measures the largest global financial bubble in history. Stock prices of more than 50 companies rose by 100% to 800% in less than a year and then lost nearly all of their gains within two months. The question is: why? In this paper we hand-collect new, high-frequency, cross-sectional data from 1720 to test theories about market bubbles. Our tests suggest that innovation was a key driver of bubble expectations. We present evidence in contrast with 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’s (2009) for new economy stocks.

Using detailed transactions data for one major bubble company in the Netherlands we also test recent clientele-based theories about bubbles. In contrast to results for the recent tech bubble, we find no evidence that the trades of either insiders or arbitrageurs were coordinated or that they triggered the Dutch 1720 crash. We also show little evidence of arbitrageurs liquidating their positions shortly after the price collapse.

Number of Pages in PDF File: 81

JEL Classification: G01, G15, N13, N23

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Date posted: April 1, 2009 ; Last revised: July 31, 2012

Suggested Citation

Frehen, Rik and Goetzmann, William N. and Rouwenhorst, K. Geert, New Evidence on the First Financial Bubble (July 27, 2012). Yale ICF Working Paper No. 09-04. Available at SSRN: http://ssrn.com/abstract=1371007

Contact Information

Rik G. P. Frehen (Contact Author)
Tilburg University - Department of Finance ( email )
P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands
William N. Goetzmann
Yale School of Management - International Center for Finance ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5950 (Phone)
203-432-8931 (Fax)
HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
K. Geert Rouwenhorst
Yale School of Management - International Center for Finance ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)
HOME PAGE: http://som.yale.edu/~geert/

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