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Foreshadowing LTCM: The Crisis of 1763

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  • Schnabel, Isabel

    () (Sonderforschungsbereich 504)

  • Shin, Hyun Song

    () (Department of Economics and Finance, London School of Economics)

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.

Suggested Citation

  • Schnabel, Isabel & Shin, Hyun Song, 2001. "Foreshadowing LTCM: The Crisis of 1763," Sonderforschungsbereich 504 Publications 02-46, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  • 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

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    1. Kahn, Charles M. & Roberds, William, 2007. "Transferability, finality, and debt settlement," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 955-978, May.
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    Cited by:

    1. Stephen Morris & Hyun Song Shin, 2004. "Liquidity Black Holes," Review of Finance, European Finance Association, vol. 8(1), pages 1-18.
    2. Temin, Peter & Voth, Hans-Joachim, 2006. "Banking as an emerging technology: Hoare's Bank, 1702 1742," Financial History Review, Cambridge University Press, vol. 13(02), pages 149-178, October.
    3. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
    4. Michael D. Bordo, 2008. "An Historical Perspective on the Crisis of 2007-2008," NBER Working Papers 14569, National Bureau of Economic Research, Inc.
    5. Brenda Gonzalez-Hermosillo & Vance Martin & Renee Fry & Mardi Dungey, 2003. "Unanticipated Shocks and Systemic Influences; The Impact of Contagion in Global Equity Markets in 1998," IMF Working Papers 03/84, International Monetary Fund.
    6. Michael D. Bordo, 2011. "A Historical Perspective on the Crisis of 2007–08," Central Banking, Analysis, and Economic Policies Book Series,in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 2, pages 011-027 Central Bank of Chile.

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