Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Rational Equity Valuation at the Time of the South Sea Bubble

Rational Equity Valuation at the Time of the South Sea Bubble In this article I examine equity valuation at the time of the South Sea Bubble. My intent is not to calculate an ex post rational value for South Sea stock (after all, ex ante, there will always be some growth path to justify the observed price), but rather to investigate the methodology of equity valuation at that time. Contrary to popular perceptions, investors in the early eighteenth century, and even during the height of the bubble, used modern valuation techniques based on fundamentals and that were strikingly similar to those of today. The existence and use of such valuation methods cannot establish that the bubble was rational, only that the economic principles underlying market analysis and valuation were well understood by investors almost three hundred years ago. Two related, and important, revisionist accounts of early bubbles have already appeared. Peter Garber (1989, 1990) proposes market fundamental explanations for early bubbles, including the South Sea Bubble and the Dutch tulipmania, and Larry Neal (1990a) emphasizes the importance of rational structural features in the South Sea Bubble such as leverage, credit, and liquidity.2 This article supplements those two by establishing, in the context of the stock market, the existence of http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png History of Political Economy Duke University Press

Rational Equity Valuation at the Time of the South Sea Bubble

History of Political Economy , Volume 33 (2) – Jun 1, 2001

Loading next page...
 
/lp/duke-university-press/rational-equity-valuation-at-the-time-of-the-south-sea-bubble-ycSUkdBkbp
Publisher
Duke University Press
Copyright
Copyright 2001 by Duke University Press
ISSN
0018-2702
eISSN
1527-1919
DOI
10.1215/00182702-33-2-269
Publisher site
See Article on Publisher Site

Abstract

In this article I examine equity valuation at the time of the South Sea Bubble. My intent is not to calculate an ex post rational value for South Sea stock (after all, ex ante, there will always be some growth path to justify the observed price), but rather to investigate the methodology of equity valuation at that time. Contrary to popular perceptions, investors in the early eighteenth century, and even during the height of the bubble, used modern valuation techniques based on fundamentals and that were strikingly similar to those of today. The existence and use of such valuation methods cannot establish that the bubble was rational, only that the economic principles underlying market analysis and valuation were well understood by investors almost three hundred years ago. Two related, and important, revisionist accounts of early bubbles have already appeared. Peter Garber (1989, 1990) proposes market fundamental explanations for early bubbles, including the South Sea Bubble and the Dutch tulipmania, and Larry Neal (1990a) emphasizes the importance of rational structural features in the South Sea Bubble such as leverage, credit, and liquidity.2 This article supplements those two by establishing, in the context of the stock market, the existence of

Journal

History of Political EconomyDuke University Press

Published: Jun 1, 2001

There are no references for this article.