Riding the South Sea Bubble
52 Pages Posted: 12 Jan 2004 Last revised: 10 Oct 2012
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Riding the South Sea Bubble
Date Written: December 21, 2003
Abstract
This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare's Bank, a fledgling West End London banker, knew that a bubble was in progress and that it invested knowingly in the bubble; it was profitable to ride the bubble. Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by institutional factors such as restrictions on short sales or agency problems. Instead, this study demonstrates that predictable investor sentiment can prevent attacks on a bubble; rational investors may only attack when some coordinating event promotes joint action.
Keywords: Bubbles, Crashes, Synchronization Risk, Predictability, Investor Sentiment, South Sea Bubble, Market Timing, Limits to Arbitrage, Efficient Market, Hypothesis
JEL Classification: G14, G12, N23
Suggested Citation: Suggested Citation
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