Abstract
AbstractThis paper empirically investigates interdependence between major companies' stock prices during the 1720 South Sea boom and bust. This was one of the first documented major financial crashes in the European market. Empirical tests are conducted by means of rolling coefficients, multivariate cointegration, rolling cointegration, and causality tests. Results indicate a substantial interdependence among the stock prices during the boom but not during the bust period. This result implies the failure of the efficient market hypothesis and the diminishing ability of the investors to reduce portfolio risk via diversification during the boom period. The causality test results provide ample evidence of short‐term interaction between shares during the period of increasing prices.
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