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Completing Markets With Contracts: Evidence From the First Central Clearing Counterparty

Author

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  • Vuillemey, Guillaume

    (HEC Paris - Finance Department)

Abstract

I study the real effects a contracting innovation that suddenly made financial markets more complete: central clearing counterparties (CCPs) for derivatives. The first CCP to provide full insulation against counterparty risk was created in Le Havre (France) in 1882, in the coffee futures market. Using triple difference-in-differences estimation, I show that central clearing changed the geography of trade flows Europe-wide, to the benefit of Le Havre. Inspecting the mechanism using trader-level data, I show that the CCP was instrumental both to mitigate adverse selection issues and to solve a ``missing market'' problem. Increased risk-sharing possibilities enabled more gains from trade to be realized. The successful contractual innovation quickly spread to new exchanges.

Suggested Citation

  • Vuillemey, Guillaume, 2018. "Completing Markets With Contracts: Evidence From the First Central Clearing Counterparty," HEC Research Papers Series 1307, HEC Paris.
    • Handle: RePEc:ebg:heccah:1307
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    Cited by:

    1. Berndsen, Ron, 2020. "Five Fundamental Questions on Central Counterparties," Discussion Paper 2020-028, Tilburg University, Center for Economic Research.
    2. Ron Berndsen, 2021. "Fundamental questions on central counterparties: A review of the literature," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 2009-2022, December.

    More about this item

    Keywords

    financial markets; central clearing counterparties; risksharing;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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