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

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  • Eugene N. White

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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Bibliographic Info

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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Publication status: published as Eugene N. White, 2007. "The Crash of 1882 and the Bailout of the Paris Bourse," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 1(2), pages 115-144, July.
Handle: RePEc:nbr:nberwo:12933

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  1. Neal, Larry & Davis, Lance, 2006. "The evolution of the structure and performance of the London Stock Exchange in the first global financial market, 1812 1914," European Review of Economic History, Cambridge University Press, vol. 10(03), pages 279-300, December.
  2. Randall S. Kroszner, 2006. "Central counterparty clearing: history, innovation, and regulation," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 37-41.
  3. Donald Walker, 2001. "A factual account of the functioning of the nineteenth-century Paris Bourse," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 8(2), pages 186-207.
  4. Eugene White & Frederic Mishkin, 2002. "U.S.Stock Market Crashes and Their Aftermath: Implications for Monetary Policy," Departmental Working Papers 200208, Rutgers University, Department of Economics.
  5. 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.
  6. Randall S. Kroszner, 1999. "Can the Financial Markets Privately Regulate Risk? The Development of Derivatives Clearing Houses and Recent Over-the Counter Innovations," CRSP working papers 493, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. 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.
  8. 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.
  9. Randall Kroszner, 2000. "Lessons from Financial Crises: The Role of Clearinghouses," Journal of Financial Services Research, Springer, vol. 18(2), pages 157-171, December.
  10. Bernanke, Ben S, 1990. "Clearing and Settlement during the Crash," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 133-51.
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Cited by:
  1. Eugene White & Pierre-Cyrille Hautcoeur & Angelo Riva, 2014. "Floating A “Lifeboat”: The Banque De France And The Crisis Of 1889," Departmental Working Papers 201405, Rutgers University, Department of Economics.

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