New evidence on the first financial bubble

Rik Frehen, William Goetzmann and K. Rouwenhorst

Journal of Financial Economics, 2013, vol. 108, issue 3, 585-607

Abstract: The Mississippi Bubble, South Sea Bubble and the Dutch Windhandel of 1720 together represent the world's first global financial bubble. We hand-collect cross-sectional price data and investor account data from 1720 to test theories about market bubbles. Our tests suggest that innovation was a key driver of bubble expectations. We present evidence against 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 (2009) for new economy stocks. Our evidence seems inconsistent with clientele-based theories that emphasize bubble-riding and short-sales restrictions.

Keywords: Bubbles; Innovation; Clientele theory; Bubble riding; South Sea Bubble (search for similar items in EconPapers)
JEL-codes: G01 G15 N13 N23 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (42)

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Related works:
Working Paper: New Evidence on the First Financial Bubble (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:108:y:2013:i:3:p:585-607

DOI: 10.1016/j.jfineco.2012.12.008

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