Foreshadowing LTCM: The Crisis of 1763
AbstractThe 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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Bibliographic InfoPaper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 02-46.
Length: 41 pages
Date of creation: 03 Dec 2001
Date of revision:
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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