Working Paper: CEPR ID: DP17933
Authors: Guillaume Vuillemey
Abstract: Theoretically, one rationale for central clearing counterparties is the mitigation of inefficiencies associated with distressed asset sales. With novel archival data, I empirically study the first event in economic history during which a CCP successfully played this role: the global wool crisis of 1900. In the leading wool futures market in France, an inefficient equilibrium with fire sales and cascading defaults could be avoided due to price support provided by surviving CCP members. Cooperation to achieve price support – which is nowadays the main element of CCP auctions – could arise due to family relationships and cultural proximity between traders.
Keywords: fire sales; liquidity; central clearing; CCP
JEL Codes: G23; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CCP organized auctions among surviving members (D44) | prevented cascading defaults (D10) |
| CCP's decisions to prevent predatory short-selling (G18) | avoided fire sales (G33) |
| CCP's arrangements for settlements at above-market prices (D47) | maintained price stability (E64) |
| CCP's actions (D74) | shielded the local economy from adverse effects (F69) |
| CCP's decisions (D70) | stable trade flows during and after the crisis (F44) |
| family ties and cultural proximity (Z13) | cooperation among traders (P13) |
| CCP's intervention during the global wool crisis of 1900 (P13) | mitigated fire sales (G33) |