Riding the South Sea Bubble

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)

Multiple version iconThere 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

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

Hans-Joachim Voth (Contact Author)

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

Raemistrasse 71
Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Peter Temin

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

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Cambridge, MA 02142
United States
617-253-3126 (Phone)
617-253-6915 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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