Price formation on clandestine markets: the case of the Paris gold market during the Second World War

Because of the scarcity of data, there are few quantitative analyses dealing with clandestine markets, despite their prime importance during wartime. This article exploits a unique database of daily prices of gold coins traded in occupied Paris in order to gain insights into the price formation on such a market. First, using data from Switzerland, we show that arbitrage took place, despite the costs and risks involved, and led to a gradual (but incomplete) convergence of gold prices. Furthermore, a study of price seasonality reveals that less strict borders controls during the weekends made the volatility of returns higher at the start of the following week. Second, on the basis of an event study, we provide evidence that laws related to black markets did not have a significant impact on the gold price, except for the most severe law passed on 8 June 1943 which greatly increased the sentences for involvement. Finally, we assess whether the so‐called coin premiums existed on this clandestine market, and show that the large price variations for one gram of fine gold contained in different coins were due to market participants’ preferences for specific gold coins.