Paper #861

Title:

Riding the South Sea bubble

Authors:

Peter Temin and Joachim Voth

Date:

December 2004

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 nonetheless invested in the stock; 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:

Efficient Market Hypothesis, Bubbles, Crashes, Synchronization Risk, Investor Sentiment, South Sea Bubble, Market Timing, Limits to Arbitrage

JEL codes:

G14, E44, N23

Area of Research:

Economic and Business History

Published in:

American Economic Review, American Economic Association, vol. 94(5), pp. 1654-1668, December 2004

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