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East India bonds, 1718–1763: early exotic derivatives and London market efficiency

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  • MARCO, PILAR NOGUÉS
  • MALLE-SABOURET, CAMILA VAM

Abstract

Were eighteenth-century financial markets efficient? Neal (1990) shows that the London and Amsterdam markets were integrated. Yet some scholars find that the London capital market was either not integrated across various classes of securities, or was comprised of ignorant investors who were not knowledgeable enough to arbitrage across securities with different maturities, or was even irrational at times. In this article, we demonstrate that these London capital market inefficiencies suggested by previous scholars arise from an incorrect comprehension of the pricing of the financial instrument they use. After examining certain features peculiar to India bonds overlooked by previous authors, we make it clear that the London domestic market was perfectly integrated and that investors were capable of handling and pricing sophisticated options.

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  • Marco, Pilar Noguã‰S & Malle-Sabouret, Camila Vam, 2007. "East India bonds, 1718–1763: early exotic derivatives and London market efficiency," European Review of Economic History, Cambridge University Press, vol. 11(3), pages 367-394, December.
    • Handle: RePEc:cup:ereveh:v:11:y:2007:i:03:p:367-394_00
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    Cited by:

    1. Murphy, Anne L., 2014. "Making the market: Trading debt at the Eighteenth-Century Bank of England," eabh Papers 14-05, The European Association for Banking and Financial History (EABH).
    2. Nogues-Marco, Pilar, 2017. "Money Markets and Exchange Rates in Pre-Industrial Europe," Working Papers unige:100808, University of Geneva, Paul Bairoch Institute of Economic History.
    3. Freire Costa, Leonor & Münch Miranda, Susana & Nogues-Marco, Pilar, 2021. "Early modern financial development in the Iberian peninsula," Working Papers unige:147492, University of Geneva, Paul Bairoch Institute of Economic History.
    4. G. Geoffrey Booth & Sanders S. Chang, 2017. "Domestic exchange rate determination in Renaissance Florence," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 11(3), pages 405-445, September.

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