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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Recreating the south sea bubble: lessons from an experiment in financial history
Organization Unit
  • Giovanni Giusti
  • Charles Noussair
  • Hans-Joachim Voth
  • English
Institution University of Zurich
Series Name Working paper series / Department of Economics
Number 146
ISSN 1664-7041
Number of Pages 50
Date 2014
Abstract Text Major bubble episodes are rare events. In this paper, we examine what factors might cause some asset price bubbles to become very large. We recreate, in a laboratory setting, some of the specific institutional features investors in the South Sea Company faced in 1720. Several factors have been proposed as potentially contributing to one of the greatest periods of asset overvaluation in history: an intricate debt-for-equity swap, deferred payment for these shares, and the possibility of default on the deferred payments. We consider which aspect might have had the most impact in creating the South Sea bubble. The results of the experiment suggest that the company’s attempt to exchange its shares for government debt was the single biggest contributor to the stock price explosion, because of the manner in which the swap affected fundamental value. Issuing new shares with only partial payments required, in conjunction with the debtequity swap, also had a significant effect on the size of the bubble. Limited contract enforcement, on the other hand, does not appear to have contributed significantly.
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Keywords Financial bubbles, experiments, South Sea bubble, risk-shifting, government debt, equity issuance, Finanzblase, Spekulationsblase, Südseeblase, Geschichte, 18. Jahrhundert