The Crisis of 1873: Perspectives from Multiple Asset Classes

Abstract:     
This paper analyzes asset pricing behavior during the period leading up to the Crisis of 1873. Evidence is presented that equities, options, and bonds priced risks consistently, suggesting
that investors were actively monitoring the risk of investing and were not caught up in an irrational, speculative mania. Implied probability density functions for stock returns suggest that option markets exhibited growing concern about substantial price declines prior to the crash. Concerns were concentrated on riskier, more leveraged firms with uncertain prospects. Deteriorating balance sheet fundamentals for the riskiest U.S. railroads set the stage for a market disruption in 1873 as information asymmetries worsened.

Keywords: Crisis of 1873, options, implied distribution

JEL Classifications: N21, G13

Accepted Paper Series