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.
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
University of Chicago Press