Counterparty Risk and the Establishment of the New York Stock Exchange Clearinghouse

Authors

Asaf Bernstein, University of Colorado, Boulder
Eric Hughson, Claremont McKenna College
Marc Weidenmier, Chapman UniversityFollow

Document Type

Article

Publication Date

2-12-2019

Abstract

We examine the effect of the establishment of the New York Stock Exchange (NYSE) clearinghouse in 1892 on counterparty risk using a novel historical experiment. During this period, the NYSE stocks were dual-listed on the Consolidated Stock Exchange (CSE), which already had a clearinghouse. Using identical securities on the CSE as a control, we find that the introduction of multilateral net settlement through a clearinghouse substantially reduced volatility of NYSE returns caused by settlement risk and increased asset values. Our results indicate that a clearinghouse can improve market stability and value through a reduction in network contagion and counterparty risk.

Comments

This article was originally published in Journal of Political Economy, volume 127, issue 2, in 2019. DOI: 10.1086/701033

Recommended Citation

Bernstein, A., Hughson, E., & Weidenmier, M. (2019). Counterparty risk and the establishment of the New York Stock Exchange Clearinghouse. Journal of Political Economy, 127(2), 689-729. doi: 10.1086/701033

Peer Reviewed

1

Copyright

University of Chicago Press