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Foreshadowing LTCM: The Crisis of 1763

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Author Info
Schnabel, Isabel () (Sonderforschungsbereich 504)
Shin, Hyun Song () (Department of Economics and Finance, London School of Economics)

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Abstract

The financial crisis that swept across northern Europe in 1763 bears an uncanny resemblance to more recent episodes of financial market turbulence - in particular, to the events of autumn 1998 when mature financial markets were caught in a severe liquidity crisis, culminating in the near collapse of Long-Term Capital Management. We highlight the salient features of the 1763 crisis, propose a stylized model of the events, and draw parallels between the events of 1763 and 1998. Whilst the financial landscape has changed fundamentally in the intervening two hundred or so years, the policy lessons have a resonance that transcend this gap in time. The potentially devastating effects of liquidity risk, the limits to hedging and financial engineering, and the importance of timely crisis management by the authorities are all lessons that have currency today as they did in 1763.

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Publisher Info
Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 02-46.

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Length: 41 pages
Date of creation: 03 Dec 2001
Date of revision:
Handle: RePEc:xrs:sfbmaa:02-46

Note: We are indebted to Steve Cecchetti, Charles Goodhart, Martin Hellwig, Nobu Kiyotaki, Jamie McAndrews, Will Roberds and Peter Sinclair for their comments on earlier drafts. We thank Rainer Metz, Hans-Jürgen Gerhard and Alexander Engel for their support in the collection of the commodity price data. We have benefited from the comments of participants at the Bank of England conference on capital flows and seminar participants at the University of Mannheim and the Bank for International Settlements.
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. C. H. Furfine, 2001. "The costs and benefits of moral suasion: Evidence from the rescue of long-term capital management," BIS Working Papers 103, Bank for International Settlements. [Downloadable!]
  2. Myron S. Scholes, 2000. "Crisis and Risk Management," American Economic Review, American Economic Association, vol. 90(2), pages 17-21, May. [Downloadable!] (restricted)
  3. Bong-Chan Kho & Dong Lee & Rene M. Stulz, 2000. "U.S. Banks, Crises, and Bailouts: From Mexico to LTCM," American Economic Review, American Economic Association, vol. 90(2), pages 28-31, May. [Downloadable!] (restricted)
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  4. Martin Hellwig, 1995. "Systemic Aspects of Risk Management in Banking and Finance," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 131(IV), pages 723-737, December. [Downloadable!]
  5. Antonio E. Bernardo & Ivo Welch, 2002. "Financial Market Runs," NBER Working Papers 9251, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Craig Furfine, 2001. "The costs and benefits of moral suasion: evidence from the rescue of long-term capital management," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 423-449.
  7. Kahn, Charles M. & Roberds, William, 2007. "Transferability, finality, and debt settlement," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 955-978, May. [Downloadable!] (restricted)
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  1. Stephen Morris & Hyun Song Shin, 2003. "Liquidity Black Holes," Cowles Foundation Discussion Papers 1434, Cowles Foundation, Yale University. [Downloadable!]
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  2. Rodrigo Cifuentes & Gianluigi Ferrucci & Hyun Song Shin, . "Liquidity risk and contagion," Bank of England working papers 264, Bank of England. [Downloadable!]
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