Riding the South Sea Bubble

Voth, Hans-Joachim; Temin, Peter

Riding the South Sea Bubble

CEPR Discussion Paper No. 4221

43 Pages Posted: 26 Feb 2004

See all articles by Hans-Joachim Voth

Hans-Joachim Voth

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

Peter Temin

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

There are 2 versions of this paper

Date Written: January 2004

Abstract

The efficient markets hypothesis implies that, in the presence of rational investors, bubbles cannot develop. We analyse the trading behaviour of a sophisticated investor, a London goldsmith bank, during the South Sea bubble in 1720. The bank believed the stock to be overvalued, yet found it profitable not to attack the bubble. Detailed examination of daily transactions in the London stock market shows that 'riding the bubble' was a highly profitable strategy. These findings lend support to recent theoretical work arguing that predictable investor sentiment may prevent rational investors from attacking a bubble.

Keywords: Speculation, bubbles, investor sentiment, South Sea company

JEL Classification: G12, G14, N23

Suggested Citation: Suggested Citation

Voth, Hans-Joachim and Temin, Peter, Riding the South Sea Bubble (January 2004). CEPR Discussion Paper No. 4221. Available at SSRN: https://ssrn.com/abstract=509661