New evidence on the first financial bubble

R.G.P. Frehen, W. Goetzmann, K.G. Rouwenhorst

Research output: Contribution to journalArticleScientificpeer-review

42 Citations (Scopus)


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.
Original languageEnglish
Pages (from-to)585-607
JournalJournal of Financial Economics
Issue number3
Publication statusPublished - 2013


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