Risk Management in the First Emerging Markets

A Micro-Study of Agents’ Behavior before, during, and after the South Sea Bubble
(with Ann Carlos, University of Colorado)

We propose to examine in detail the responses of stock market participants after the first great financial crisis of modern capitalism – the South Sea Bubble of 1720 – among the three emerging markets of the time – Paris, Amsterdam, and London. All these markets were dealing at the time with the financial experiments of new political structures that eventually defined the nation-states of Europe. Of the three, only the London market reemerged from the shock of financial collapse to become the dominant capital market of Europe in the 18^th century and the leading capital market of the world in the 19^th century. (Neal, 1990) The Paris market, by contrast, collapsed into a private debt market managed by the notary publics of Paris (Hoffman, Postel-Vinay, & Rosenthal); while the Amsterdam market remained fragmented among the debt issues of the various cities and provinces (Marjolein t’Hart). We will exploit data we have collected and will be collecting on the transfers and holdings of the major financial assets available in the London market among all individuals who held these assets before, during, and after the crisis of 1720. Our analysis of the changes that took place in the distribution of these assets, especially in the period 1721 to 1730, will allow us to explore the factors that enabled the underlying structures of the English financial system to absorb the shock and then rebound, based on the private initiatives of these participants.

For the full proposal: ../../Word/Bubble/NSFdraft6.doc

This project seeks to expand our understanding of the years surrounding the South Sea Bubble of 1720, the first great financial crisis of modern capitalism, by focusing on the individuals who actually purchased shares and thus made portfolio decisions. We examine in detail the responses of stock market participants before, during, and especially after the financial collapse of the South Sea Company. To do this, we exploit data we have already collected (NSF 99-11270) and continue to collect and encode on the holdings and transfers of the major financial assets available in the London market among all individuals who held these assets before, during, and after the crisis of 1720. We reconstruct the transfers of stock holdings in the South Sea Company itself after its reorganization in 1723, as well as in the Bank of England, the East India Company (both competing with the South Sea Company for investors), the Royal African Company (complementary to the South Sea Company), and the Hudson's Bay Company (completely removed from the action). Combining all four sources, then, we determine how all stockholders responded to the spectacular rise and fall of the South Sea Company in two competing companies, a complementary company, and a noncommittal company.

Our examination of the changes that took place in the distribution of these assets, especially in the period 1721 to 1730, is an intensive analysis of the reallocation of financial risk by market participants in the first emerging market after a major financial collapse. Especially interesting to us are contrasts in trading activity between the pre- and post-bubble periods and the changes we observe in activity by specialized traders as well as the role played by the increasingly diverse consumer base. Analyzing these changes in individual behavior within the unregulated and untaxed stock market of the time helps us understand how financial markets recover from systemic shocks.

For the full proposal: ../../Word/Bubble/NSF2002v6.pdf