Working Paper: NBER ID: w12933
Authors: Eugene N. White
Abstract: The rapid growth of derivative markets has raised concerns about counterparty risk. It has been argued that their mutual guarantee funds provide an adequate safety net. While this mutualization of risk protects clients and brokers from idiosyncratic shocks, it is generally assumed that it also offers protection against systemic shocks, largely based on the observation that no twentieth century exchange has been forced to shut down. However, an important exception occurred in 1882 when the crash of the French stock market nearly forced the closure of the Paris Bourse. This exchange's structure was very similar to today's futures markets, with a dominant forward market leading the Bourse to adopt a common fund to guarantee transactions. Using new archival data, this paper shows how the crash overwhelmed the Bourse's common fund. Only an emergency loan from the Bank of France, intermediated by the largest banks, prevented a closure of the Bourse.
Keywords: Counterparty Risk; Bailout; Paris Bourse; 1882 Crash
JEL Codes: E58; G18; N23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| systemic shock (P50) | liquidity crisis (G01) |
| failure of common fund (G33) | liquidity of the exchange (F31) |
| emergency loan from Bank of France (F34) | survival of the Bourse (G19) |
| mutual guarantee fund (G23) | riskier behavior by brokers (G24) |
| liquidity crisis (G01) | failure of brokers (G24) |