Working Paper: CEPR ID: DP13230
Authors: Guillaume Vuillemey
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.
Keywords: incomplete markets; contracts; central clearing; international trade
JEL Codes: G23; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of CCP (Y20) | mitigation of counterparty risk (G33) |
| mitigation of counterparty risk (G33) | increase in trade gains (F19) |
| introduction of CCP in Le Havre (Y20) | increase in coffee imports (F69) |
| introduction of CCP in Le Havre (Y20) | increase in cotton imports (F10) |
| introduction of CCP in Le Havre (Y20) | change in geography of trade flows across Europe (N93) |