Danger on the Exchange: How Counterparty Risk Was Managed on the Paris Bourse in the Nineteenth Century

36 Pages Posted: 11 Jan 2010 Last revised: 21 Sep 2010

See all articles by Angelo Riva

Angelo Riva

affiliation not provided to SSRN

Eugene N. White

Rutgers, The State University of New Jersey

Date Written: January 2010

Abstract

Over the course of the nineteenth century, the struggles of Paris Bourse to manage counterparty risk revealed the awkward choices that face derivatives exchanges. Shortly after it was founded, the stock exchange, primarily a forward market, instituted a mutual guarantee fund to prevent broker failures from snowballing into a general liquidity crisis. The creation of the fund then forced the Bourse to search for mechanisms to control moral hazard. To study the determinants of broker failures, we collected new individual data on defaulting brokers and describe the evolving regulatory regime. To identify the factors behind the annual number of broker failures we use negative binominal regressions. To explain individual brokers' duration in office, we employ a proportional hazard model, while logit regressions examine the causes of individual broker failures. In addition to declines in asset prices and trading volume, the moral hazard from the mutual guarantee fund contributed to brokers' defaulting on their obligations. The Bourse faced a conundrum; when it finally imposed a tight regulatory regime that limited risk, trading began to migrate off the exchange to less regulated markets.

Suggested Citation

Riva, Angelo and White, Eugene N., Danger on the Exchange: How Counterparty Risk Was Managed on the Paris Bourse in the Nineteenth Century (January 2010). NBER Working Paper No. w15634, Available at SSRN: https://ssrn.com/abstract=1533668

Angelo Riva (Contact Author)

affiliation not provided to SSRN ( email )

Eugene N. White

Rutgers, The State University of New Jersey ( email )

311 North 5th Street
New Brunswick, NJ 08854
United States

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