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The Crash of 1882, Counterparty Risk, and the Bailout of the Paris Bourse

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Eugene N. White

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Abstract

The rapid growth of derivative markets has raised concerns about counterparty risk. It has been argued that their mutual guarantee funds provide an adequate safety net. While this mutualization of risk protects clients and brokers from idiosyncratic shocks, it is generally assumed that it also offers protection against systemic shocks, largely based on the observation that no twentieth century exchange has been forced to shut down. However, an important exception occurred in 1882 when the crash of the French stock market nearly forced the closure of the Paris Bourse. This exchange's structure was very similar to today's futures markets, with a dominant forward market leading the Bourse to adopt a common fund to guarantee transactions. Using new archival data, this paper shows how the crash overwhelmed the Bourse's common fund. Only an emergency loan from the Bank of France, intermediated by the largest banks, prevented a closure of the Bourse.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12933.

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Date of creation: Feb 2007
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Handle: RePEc:nbr:nberwo:12933

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Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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  1. Pirrong, S.C., 1997. "A Positive Theory of Financial Exchange Organization with Normative Implications for Financial Market Regulation," Washington University 97-06, Business, Law and Economics Center, John M. Olin School of Business, Washington University.
  2. James T. Moser, 1998. "Contracting innovations and the evolution of clearing and settlement methods at futures exchanges," Working Paper Series WP-98-26, Federal Reserve Bank of Chicago. [Downloadable!]
  3. Donald A. Walker, 2001. "A factual account of the functioning of the nineteenth-century Paris Bourse," European Journal of the History of Economic Thought, Taylor and Francis Journals, vol. 8(2), pages 186-207, June. [Downloadable!] (restricted)
  4. Bernanke, Ben S, 1990. "Clearing and Settlement during the Crash," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(1), pages 133-51. [Downloadable!] (restricted)
  5. Randall Kroszner, 2000. "Lessons from Financial Crises: The Role of Clearinghouses," Journal of Financial Services Research, Springer, vol. 18(2), pages 157-171, December. [Downloadable!] (restricted)
  6. Randall S. Kroszner, 2006. "Central counterparty clearing: history, innovation, and regulation," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 37-41. [Downloadable!]
  7. Robert A. Jarrow, 2001. "Counterparty Risk and the Pricing of Defaultable Securities," Journal of Finance, American Finance Association, vol. 56(5), pages 1765-1799, October. [Downloadable!] (restricted)
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