Riding the South Sea Bubble

• Authors: Hans-Joachim Voth.
• BSE Working Paper: 112279 | September 15
• Keywords: Bubbles , crashes , synchronization risk , predictability , investor sentiment , South Sea Bubble , market timing , limits of arbitrage , efficient market hypothesis
• JEL codes: G14, G12, N23
• Bubbles
• crashes
• synchronization risk
• predictability
• investor sentiment
• South Sea Bubble
• market timing
• limits of arbitrage
• efficient market hypothesis

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.