Electronic copy available at: http://ssrn.com/abstract=1371007

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Yale ICF Working Paper No. 09-04

New Evidence on the First Financial Bubble

Rik G. P. Frehen Tilburg University

William N. Goetzmann School of Management, Yale University

K. Geert Rouwenhorst School of Management, Yale University

Electronic copy available at: http://ssrn.com/abstract=1371007

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New!Evidence!on!the!First!Financial!Bubble!!

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1

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log(Share!Price)

Dutch!Companies!in!1720WIC

WIC!1st

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OIC

Agio

Rotterdam!1st

Rotterdam!2nd

Delft!1st

Middelburg!Ass.

Den!Haag

Gouda

Schiedam

Utrecht

Naarden

Weesp

Muiden

Medemblik

Enkhuizen

Hoorn

Edam

Monnikendam

Purmerend

Alkmaar

Zwolle

Middelburg!CommercieVeere

Dordrecht

Vlaardingen

Brielle

Maassluis

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Conclusion!

B-"!A,399S9"A4&3#0/!":&F"#A"!C,31!P,&4&9-!0#F!U74A-!C&,19!&#!GH=>!F3"9!#34!F&,"A4/L!0//38!0!4"94!3C!8-"4-",!&#:"941"#4!&#!9-0,"9!04!4-"!4&1"!809!"A3#31&A0//L!,04&3#0/)!!R#94"0F$! &4! E,3:&F"9! 13,"! &#C3,104&3#! 0;374! 4-"! #047,"! 0#F! 4&1&#D! 3C! &#:"943,!"KE"A404&3#9)!!!!

B-"!F040! C3,!10\3,!P,&4&9-! A31E0#&"9! 97DD"949! 4-04! "KE"A404&3#9! V,04&3#0/! 3,! #34Y!0;374! 4-"! @4/0#4&A! 4,0F"! 10L! -0:"! ;""#! 0#! &1E3,40#4! C0A43,)! B-"! F&CC","#4&0/!;"48""#!4-"!N374-!N"0!O31E0#L!0#F!4-"!J094!R#F&0!O31E0#L!&#!4-"!P,&4&9-!10,'"4!&9!104A-"F!;L!4-"!F&CC","#4&0/!;"48""#!4-"!U74A-!J094!0#F!."94!R#F&"9!O31E0#&"9)!!!B-&9!-LE34-"9&9! &9!97EE3,4"F!;L!0!4"94!3C!4-"!9&5"!3C!4-"!;7;;/"!79&#D!0#34-",!F040!9"4! 3C! g;7;;/"9)h! B-"! ;7;;/"! &#! 34-",! @4/0#4&AS4,0F"! C&,19$! "KA/7F&#D! 4-"! %3L0/!@C,&A0#!O31E0#L!0#F!4-"!N374-!N"0!O31E0#L$!0/93!"KA""F"F!4-"!10K&171!D,384-!&#!J094!R#F&"9!O31E0#L!9-0,"9!&#!GH=>)!!!!

."! -0:"! E,&A"! ,"A3,F9! C3,! #&#"! 10\3,! C&,19! 3:",! 4-"! L"0,! GH=>c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g;7;;/"h! 10L! -0:"! ;""#!;09"F!7E3#!931"!C7#F01"#40/!A3113#!C0A43,!4-04!\794&C&"F!0!:0/7"!&#A,"09")!!.-&/"!&#:"943,!&,,04&3#0/&4L!10L!-0:"!A0,,&"F!E,&A"9!43!10#L!17/4&E/"9!3C!4-"&,!E394SA,09-!:0/7"$! 4-"! ;7;;/"! 9E"A7/04&3#! 10L! -0:"! 0#4&A&E04"F! 931"! /3#DS4",1! E",10#"#4!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

31!B-"!,"97/49!3C!4-"!,3;794#"99!4"949!0,"!#34!,"E3,4"F!;74!0:0&/0;/"!3#!,"[7"94)!32!N374-!N"09!o!l]n!D0&#$!%3L0/!@C,&A0!o!?Gn!D0&#!0#F!."94!R#F&"9!O31E0#L!]Gn!D0&#)!

!

^G!

B-"! A,399S9"A4&3#0/! F040! 0/93! 9-38! 4-04! 9E"A7/04&3#! &#! &#97,0#A"! A31E0#&"9! 809!0#34-",! &1E3,40#4! C0A43,! &#! 4-"! ;7;;/")! B-"! A-0,4",&#D! 0#F! &#A3,E3,04&3#! 3C!&#97,0#A"! A31E0#&"9! &#! 4-"! "0,/L! Gi4-! A"#47,L! 809! 0! C&#0#A&0/! &##3:04&3#)! R4!"K4"#F"F! 4-"! E34"#4&0//L! :0/70;/"! C"047,"! 3C! /&1&4"F! /&0;&/&4L! 43! C&,19! 4-04! F"0/4! &#!,&9')!P"C3,"!4-&9!4,0#9&4&3#$!&#97,0#A"!809!E,3:&F"F!;L!7#F",8,&4",9!3E",04&#D!0/3#"!3,! &#! 9L#F&A04"9! 4-04! E33/"F! A0E&40/)! .&4-! 4-"! 4,0#9&4&3#! 43! A3,E3,04&3#9! A01"!;,30F",! 0AA"99! 43! E7;/&A! A0E&40/)! B-"! #"8$! /&[7&F! 943A'! 10,'"49! D0:"! 4-"! E7;/&A!&#97,0#A"! C&,19! 4-"! A0E0A&4L! 43! &#A,"09"! 4-"&,! A0E&40/! ;09"! 0#F! 43! F&:",9&CL! 4-"&,!,&9'9)!!B-"9"!10L!-0:"!;""#!E",A"&:"F!09!:0/70;/"!C&#0#A&0/!&##3:04&3#9!04!4-"!4&1")!!Z7,! F040! E,3:&F"! 0#! 3EE3,47#&4L! 43! 4"94! ,"A"#4! 4-"3,L! 0;374! 4-"! ":3/74&3#! 3C!9"A7,&4L!E,&A"9!F7,&#D!E",&3F9!3C!4"A-#3/3D&A0/!A-0#D")!!.&4-&#!4-"!/&1&49!3C!37,!F040!8"!4"94!483!&1E/&A04&3#9!3C!*0943,!0#F!X",3#"9&j9!4-"3,L!0#F!C&#F!97EE3,4!C3,!;34-)!

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! !

!

^=!

Appendix!I:!Maximum!Growth!for!London!Companies,!1720!Highest!price!paid!and!nominal!value!of!share!

!

!!

Company! Industry

Nom.!Value!or!Lowest!Mkt!Value

High!Price!

Growth

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!

^l!

Appendix!II:!Maximum!Growth!for!Dutch!Companies,!1720!!

Date increase Primary MentionInsurance

!!

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The!interpretation!of!price!quotes!

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Bibliography!O0,/39$!@)$!Q0D7&,"$!6)$!W!2"0/$!I)!V=>><Y)!+&#0#A&0/!0A71"#$!831"#!9E"A7/043,9$!0#F!4-"!%3L0/!@C,&A0#!A31E0#L!F7,&#D!4-"!N374-!N"0!;7;;/")!Accounting,!Business!and!Financial!History!$!=G?b=l^)!U0/"$!%)!N)$!_3-#93#$!_)!J)$!W!B0#D$!I)!V=>>]Y)!+&#0#A&0/!10,'"49!A0#!D3!10FM!":&F"#A"!3C!&,,04&3#0/!;"-0:&37,!F7,&#D!4-"!N374-!N"0!P7;;/")!Economic!History!Review!$!=^^!S!=HG)!

]l)!(0,;",$!*)!Q)!VG??>Y)!+01379!+&,94!P7;;/"9)!Journal!of!Economic!Perspectives!$!^]b("/F",;/31$!Z)$!W!_3#'",$!_)!V=>>i!0#F!7EF04"F!=>>?Y)!B-"!O-0,0A4",!3C!4-"!GH=>!

-!%"E7;/&A)!.3,'&#D!E0E",$!T4,"A-4!T#&:",9&4L)!P7;;/"!&#!4-"!U74Af0,,&9$!%)!V=>>>Y)!dustrializing!English!Law:!Entrepreneurship!and!Business!Organization,!1720!1844.!O01;,&FD"M!O01;,&FD"!T#&:",9&4L!*,"99)!f0,,&9$!%)!VG??lY)!B-"!P7;;/"!@A4M!R49!*0990D"!0#F!R49!JCC"A49!3#!P79&#"99!

nomic!History!$!<G>b<=H)!Z,D0#&504&3#)!Journal!of!Eco6&#F/";",D",$!O)!*)!VG?HiY)!Manias,!Panics,!and!Crashes:!A!History!of!Financial.!2"8!`3,'M!.&/"L)!6&#D943#$!O)!V=>>iY)!@F:",9"!N"/"A4&3#!0#F!R#94&474&3#0/!O-0#D"!&#!J&D-4""#4-!O"#47,L!Q0,&#"!R#97,0#A")!Working!paper!$!T#&:",&94L!3C!@1-",94)!6&#D943#$!O)!V=>>HY)!Q0,&#"!R#97,0#A"!&#!P,&40&#!0#F!@1",&A0$!GH=>SGillM!@!O31E0,04&:"!R#94&474&3#0/!@#0/L9&9)!Journal!of!Economic!History!$!^H?Sl>?)!637F&\9$!*)!V=>>?Y)!-"!P3049!B-04!U&F!234!N0&/M!J:&F"#A"!3#!4-"!N37,A"9!3C!@99"4!*,&A"!X3/04&/&4L!C,31!0#!Gi4-!O"#47,L!2047,0/!JKE",&1"#4)!.3,'&#D!E0E",$!T#&:",9&404!*31E"7!+0;,0)!Q0A'0L$!O)!VGi]=Y)!Extraordinary!Popular!Delusions!and!the!Madness!of!Crowds.!I3#F3#M!ZCC&A"!3C!4-"!204&3#0/!R//794,04"F!I&;,0,L)!2"0/$!I)!VG??=Y)!B-"!U&9&#4"D,04&3#!0#F!%"S&#4"D,04&3#!ZC!R#4",#04&3#0/!O0E&40/!

?4-!O"#47,L)!Business!and!EconoQ0,'"49!&#!4-"!G mic!History!$!ilS?<)!2"0/$!I)!VG??>Y)!The!Rise!of!Financial!Capitalism.!2"8!`3,'M!O01;,&FD"!T#&:",9&4L!*,"99)!2"0/$!I)!VG?iiY)!B-"!,&9"!3C!4-"!C&#0#A&0/!E,"99M!I3#F3#!0#F!@194",F01$!G<iG!SGiG>)!

^bGH?)!Business!History!$!G<*0,93#9$!P)!VG?HlY)!The!behavior!of!prices!on!the!london!stock!market!in!the!early.!O-&A0D3M!T#&:",&94L!3C!O-&A0D3$!*-U!B-"9&9)!*0943,$!I)$!W!X",3#"9&$!*)!V=>>?Y)!B"A-#3/3D&A0/!%":3/74&3#9!0#F!N43A'!*,&A"9)!American!Economic!Review!$!Gl]GSGli^)!

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]HY)!Universal!Dictionary!of!Trade!and!Commerce.!I3#F3#)!*394/"4-80L4$!Q)!VGHNA344$!.)!%)!VG?G>Y)!The!Constitution!And!Finance!Of!English,!Scottish!And!Irish!Joint"Stock!Companies!To!1720.!O01;,&FD"M!O01;,&FD"!T#&:",9&4L!*,"99)!N-"0$!()!N)!V=>>HY)!+&#0#A&0/!Q0,'"4!@#0/L9&9!O0#!(3!Q0F!V&#!4-"!9"0,A-!C3,!&,,04&3#0/!

!N374-!N"0!P7;;/"Y)!Economic!History!Review!$!Hl=bH<])!;"-0:&37,!F7,&#D!4-"N/"A-4"$!f)!O)!VG?i=Y)!Een!Noodlottig!Jaar!Voor!Veel!Zotte!en!Wijze!"!De!Rotterdamse!

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N7EE/"$!P)!VG?H>Y)!The!Royal!Exchange!Assurance:!A!History!of!British!Insurance,!1720"1970.!O01;,&FD"M!O01;,&FD"!T#&:",9&4L!*,"99)!B"1&#$!*)$!W!X34-$!f)S_)!V=>>lY)!%&F&#D!4-"!N374-!N"0!P7;;/")!American!Economic!

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