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Riding the South Sea Bubble

52 Pages Posted: 12 Jan 2004 Last revised: 10 Oct 2012

Peter Temin

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 21, 2003

Abstract

This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare's Bank, a fledgling West End London banker, knew that a bubble was in progress and that it invested knowingly in the bubble; it was profitable to ride the bubble. Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by institutional factors such as restrictions on short sales or agency problems. Instead, this study demonstrates that predictable investor sentiment can prevent attacks on a bubble; rational investors may only attack when some coordinating event promotes joint action.

Keywords: Bubbles, Crashes, Synchronization Risk, Predictability, Investor Sentiment, South Sea Bubble, Market Timing, Limits to Arbitrage, Efficient Market, Hypothesis

JEL Classification: G14, G12, N23

Suggested Citation

Temin, Peter and Voth, Hans-Joachim, Riding the South Sea Bubble (December 21, 2003). American Economic Review, Vol. 94, No. 5, 2004. Available at SSRN: https://ssrn.com/abstract=485482 or http://dx.doi.org/10.2139/ssrn.485482

Peter Temin (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society ( email )

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Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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