Collaborative Research: How The First Emerging Market Re-Emerged After Financial Collapse

University Of Illinois At Urbana-Champaign, Urbana IL

Investigators

Abstract

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.