Rational Pricing of Options during the South Sea Bubble: Valuing the 22 August 1720 Options

Gary S. Shea ()
Additional contact information
Gary S. Shea: University of St. Andrews

No 410, CRIEFF Discussion Papers from Centre for Research into Industry, Enterprise, Finance and the Firm

Abstract: We present evidence of rational pricing South Sea Company liabilities and call options written on South Sea shares. A previously unstudied dataset on South Sea share options is presented. The Company's capital structure of the firm is redefined so that the application of modern financial economic theories can be applied to its valuation. We present evidence that a significant portion of South Sea equity liabilities was in the form of share warrants and conversion (from bonds to shares) privileges and should be so valued. Finally we present a model of the cross-sectional behaviour of share prices, South Sea Company debt and call option values. The model is calibrated and simulated in order to produce estimates of the required return on the Company’s debt and the volatility of the firm’s asset values. We conclude that the jointly estimated value of the firm, its constituent liabilities, third-party call option values and implied volatilities are consonant with rational pricing behaviour during the Bubble, although the model requires extension in several directions in order to present a more complete picture of the South Sea Bubble.

Keywords: financial revolution in England; South Sea Company; call options; warrants; convertible bonds (search for similar items in EconPapers)
JEL-codes: G13 N23 (search for similar items in EconPapers)
Date: 2004-02
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-his
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.st-andrews.ac.uk/crieff/dp0410.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.st-andrews.ac.uk/crieff/dp0410.pdf [302 Found]--> https://www.st-andrews.ac.uk/crieff/dp0410.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:san:crieff:0410

Access Statistics for this paper

More papers in CRIEFF Discussion Papers from Centre for Research into Industry, Enterprise, Finance and the Firm Department of Economics, Castlecliffe, The Scores, St Andrews, KY16 9AZ. Contact information at EDIRC.
Bibliographic data for series maintained by Department of Economics, The University of St Andrews Business School ().