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The crash of 1882, counterparty risk, and the bailout of the Paris Bourse

Author: Eugene N White; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2007.
Series: Working paper series (National Bureau of Economic Research), no. 12933.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
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  Read more...
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Genre/Form: History
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Eugene N White; National Bureau of Economic Research.
OCLC Number: 85451600
Description: 1 online resource (1 volume).
Series Title: Working paper series (National Bureau of Economic Research), no. 12933.
Responsibility: 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.

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