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Integration of International Capital Markets: Quantitative Evidence from the Eighteenth to Twentieth Centuries

Published online by Cambridge University Press:  03 March 2009

Larry Neal
Larry Neal
Affiliation:
The author is Professor of Economics, University of Illinois, Urbana, Illinois 61801.
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Abstract

The integration of capital markets is usually tested with an interest rate arbitrage model even though much different financial assets must be compared. This paper compares prices of identical assets that are traded simultaneously in two or more markets. The range, average level, and time series pattern of the differences can be used to infer threshold levels, transaction cost levels, and the efficiency of arbitrage operations, respectively.Examples are given for financial crises from 1745 to 1907, using prices from the London, Amsterdam, Paris, and New York stock exchanges. These show European capital markets to be well integrated by mid-eighteenth century.

Type
Papers Presented at the Forty-fourth Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 45 , Issue 2 , June 1985 , pp. 219 - 226
Copyright
Copyright © The Economic History Association 1985

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References

1 The literature begins with Davis, Lance, “The Investment Market, 1870–1914: The Evolution of a National Market,” this JOURNAL, 25 (09 1965), pp. 355–99 (commercial paper market);Google Scholar and continues with Sylla, Richard, “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1863–1913,” this JOURNAL, 29 (12 1969), pp. 657–86 (national banks);Google ScholarNeal, L., “Trust Companies and Financial Innovation, 1897–1914,” Business History Review, 45 (Fall 1971), pp. 35–51 (trust companies);Google ScholarJames, J., “The Development of the National Money Market, 1893–1911,” this JOURNAL, 36 (12 1976), pp. 878–97 (local monopoly);Google ScholarKeehn, R., “Federal Bank Policy, Bank Market Structure, and Bank Performance: Wisconsin, 1863–1914,” Business History Review, 15 (03 1980) (local regulations);Google Scholar and Sushka, M. and Barrett, W. B., “Banking Structure and the National Capital Market, 1869–1914,” this JOURNAL, 44 (06 1984), pp. 463–477 (risk premia).Google Scholar

2 Machlup, Fritz, A History of Thought on Economic Integration (New York, 1977), p. 26.CrossRefGoogle Scholar

3 Morgenstern, Oskar, International Financial Transactions and Business Cycles (Princeton, 1959), p. 508.Google Scholar

4 The Amsterdam prices were adjusted before taking the difference with the London price. The adjustment arises from the discovery that Amsterdam prices were consisitenly higher than London prices. This led to the determination that the Amsterdam prices were time prices while the London prices were spot. (Neal, L., “Efficient Markets in the Eighteenth Century? The Amsterdam and London Stock Exchanges,” in Atack, Jeremy, ed., Proceedings of the Business History Conference (Urbana, 1984). A regression equation was estimated relating the excess of the Amsterdam price over the London price to the number of days until the next payment of dividends. This equation was then used to calculate Amsterdam prices adjusted to their “spot” equivalent. The adjustment reduced the average difference found (Amsterdam spot prices are lower on average than Amsterdam time prices for both stocks) and reduced the order of the estimated ARMA models. But the variance, standard deviation, and range of differences were largely unaffected by this adjustment.Google Scholar

5 In 1855 the Amsterdam Beurs listed officially 87 securities, only 14 of which were domestic and 2 colonial. Three-fourths of these, however, were government bonds. By January 1914, the number had grown prodigiously to 1,796 of which 691 were domestic, 840 foreign, and 265 colonial. Of the foreign securities, 194 were issued by North American railroads. (Brenninkmeyer, L., Die Amsterdamer Effektenboerse [Berlin, 1920], pp. 178–83.)Google Scholar By contrast, we may note that in 1983 only 294 foreign stocks were listed in the United States, up sharply from 99 in 1979 (Business Week [July 23, 1984], p. 101).Google Scholar