Introduction

In the stock market, value investors buy and hold shares, waiting the moment when the price reflects the intrinsic value of the company. If the company is operated well, then the share price increases. What about speculators? They buy shares as they think they can sell it at a higher price regardless of fundamentals. If there is only one speculator in the stock market, he will pay for the risk. But if the market is crowded with speculators, huge demand will push the price to the peak.

Adam Anderson (1787) describes the speculative dynamics. A owns one hundred pounds in stock. B has confidence with A and buys the stock. C notices that A and B have won profit, so he also comes in with more money; and followed by D. More and more investors come in, which leads to increase in price. However, such increase is caused by subsequent partnership. What if no other investor comes in?

Immediately, the price dives. We call such price reversal phenomenon, Bubble.

More specifically, if an asset experiences a sudden dramatically price rise, the jump gives rise to optimism over earnings and attracts new investors. As demand grows, the price keeps increasing. However, once investors lose confidence in the asset, the price plunges. It is emphasized that Bubble is a process from continuous price increase to collapse. Expectation plays a key role in this process.

But what is exact definition of Bubble?

Unfortunately, there is no consensus. Peter Garber, in his book Famous First Bubbles, argues that, a fuzzy word filled with import but lacking any solid operational definition.

For example, Kindleberger proposes in his book, Manias, Crashes, and Panics (1996), “a bubble is an upward price movement over an extended range that then implodes”.

Many scholars define bubble using price movement. In economics, bubble is referred to a situation where ex post asset prices are regarded as over-valued and not based on fundamentals.

Azariadis(1981)states that there are three well-documented cases of speculative price movements, the Dutch tulip mania, the South Sea bubble in England and the Mississippi bubble in France.

 In the blog, I would like to research the Mississippi bubble and divide the event into three stages. In the first stage, we focus on how the bubble forms: a shock in monetary system and growing optimism. In the second stage, the bubble is inflated with credit expansion and surge in share price. In the last stage, negative shock causes bubble collapse.

But before these three stages, I would like to talk something about John Law and his monetary theory in the next post. From my point of view, his story is pioneering!