Price momentum and the 1719-20 bubbles: A method to compare and interpret booms and crashes in asset markets

Condorelli, Stefano (2018): Price momentum and the 1719-20 bubbles: A method to compare and interpret booms and crashes in asset markets.

Abstract

This paper attempts to address one major problem with bubble studies: the difficulty to rigorously compare assets bubbles (that is to say compare them via quantitative data, rather than simply anecdotal evidence). The idea of the paper is to use a metric that is not the level of price itself, but that is connected to it. This metric is price momentum (i.e. the magnitude and speed of price changes). Momentum is measured with a technical indicator: the Relative Strength Index (RSI). The RSI is popular among traders, yet it is not normally used as a tool of comparison. In particular, there appears to be no academic study that has hitherto employed the RSI as a metric to compare different booms and crashes. Likewise, it seems that the RSI was never applied to early modern markets (such as the Mississippi and South Sea Bubbles), or to early 20th century markets (such as the 1929 crash). The paper does all this (based on historical securities prices). Furthermore, it develops news concepts and metrics (such as “strong momentum with low volatility”, “momentum efficiency”, and accumulated RSI readings) that are connected to the notion of momentum. These concepts, in turn, are interpreted through the lens of archival evidence. The result is a new method of analysis – which is not concerned with market forecasting, but only with comparison and historical interpretation – that sheds new light on the 1719 20 bubbles themselves.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial history, South Sea Bubble, Mississippi Bubble, Dutch Wind Trade, Relative Strength Index, momentum, volatility, stock market bubbles and crashes, euphoria
• Subjects: F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G1 - General Financial Markets > G19 - Other; N - Economic History > N2 - Financial Markets and Institutions > N23 - Europe: Pre-1913

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