The Crash of 1882, Counterparty Risk, and the Bailout of the Paris Bourse

39 Pages Posted: 24 Feb 2007

See all articles by Eugene N. White

Eugene N. White

Rutgers University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2007

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.

Suggested Citation

White, Eugene Nelson, The Crash of 1882, Counterparty Risk, and the Bailout of the Paris Bourse (February 2007). NBER Working Paper No. W12933. Available at SSRN: https://ssrn.com/abstract=965125

Eugene Nelson White (Contact Author)

Rutgers University - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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