Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-25T18:50:19.935Z Has data issue: false hasContentIssue false
  • English
  • Français

The Crisis of 1873: Perspectives from Multiple Asset Classes

Published online by Cambridge University Press:  01 September 2008

SCOTT MIXON
SCOTT MIXON*
Affiliation:
Director of Alternative Investments Strategy, Société Générale Corporate & Investment Banking, 1221 Avenue of the Americas, New York, NY 10020. E-mail: otismixon@hotmail.com.
Get access Rights & Permissions [Opens in a new window]

Abstract

This article 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. Deteriorating balance sheet fundamentals for the riskiest U.S. railroads set the stage for a market disruption in 1873 as information asymmetries worsened.

Type
ARTICLES
Information
The Journal of Economic History , Volume 68 , Issue 3 , September 2008 , pp. 722 - 757
Copyright
Copyright © The Economic History Association 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adler, Dorothy. British Investment in American Railways, 1834–1898. Charlottesville: University Press of Virginia, 1970.Google Scholar
Bakshi, Gurdip, & Kapadia, Nikunj. “Volatility Risk Premiums Embedded in Individual Equity Options: Some New Insights.” Journal of Derivatives 11, no. 1 (2003): 45–54.Google Scholar
Bates, David. “The Crash of '87: Was It Expected? The Evidence from Options Markets.” Journal of Finance 46, no. 3 (1991): 1009–44.Google Scholar
Bates, David, & Craine, Roger. “Valuing the Futures Market Clearinghouse's Default Exposure during the 1987 Crash.” Journal of Money, Credit, and Banking 31, no. 2 (1999): 248–72.CrossRefGoogle Scholar
Black, Fischer, & Scholes, Myron. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81, no. 3 (1973): 637–54.CrossRefGoogle Scholar
Bliss, Robert, & Panigirtzoglu, Nikolaos. “Option-Implied Risk Aversion Estimates.” Journal of Finance 59, no. 1 (2004): 407–46.Google Scholar
Bollen, Nicholas P., & Whaley, Robert E.. “Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?” Journal of Finance 59, no. 2 (2004): 711–53.Google Scholar
Bordo, Michael. “Discussion: The Panic of 1873 and Financial Market Volatility and Panics Before 1914.” In Crashes and Panics: The Lessons from History, edited by White, Eugene, 126–32. Homewood, IL: Business One Irwin, 1990.Google Scholar
Breeden, Douglas, & Litzenberger, Robert. “Prices of State-Contingent Claims Implicit in Options Prices.” Journal of Business 51, no. 4 (1978): 621–51.Google Scholar
Calomiris, Charles, & Gorton, Gary. “The Origins of Banking Panics: Models, Facts, and Bank Regulation.” In Financial Markets and Financial Crises, edited by Hubbard, R. G., 109–73. Chicago, IL: NBER and University of Chicago Press, 1991.Google Scholar
Commercial and Financial Chronicle, various dates.Google Scholar
Davis, Joseph H.“An Annual Index of U.S. Industrial Production, 1790–1915.” Quarterly Journal of Economics 119, no. 4 (2004): 1177–215.Google Scholar
Franks, Julian, Mayer, Colin, & Wagner, Hannes. “The Origins of the German Corporation: Finance, Ownership and Control.” Review of Finance 10, no. 4 (2006): 537–85.CrossRefGoogle Scholar
Friedman, Milton, & Schwartz, Anna J., 1963. A Monetary History of the United States, 1867-1960. Princeton, NJ: Princeton University Press.Google Scholar
Gârleanu, Nicolae, Heje Pedersen, Lasse, and Poteshman, Allen M.. “Demand-Based Option Pricing.” manuscript, University of Pennsylvania, 2006.CrossRefGoogle Scholar
Gemmill, Gordon, & Saflekos, Apostolos. “How Useful are Implied Distributions? Evidence from Stock-Index Options.” Journal of Derivatives 7, no. 3, (2000): 83–99.CrossRefGoogle Scholar
Gorton, Gary. “Banking Panics and Business Cycles.” Oxford Economic Papers 40, no. 4 (1988): 751–81.Google Scholar
Graham, Frank. “International Trade Under Depreciated Paper: The United States, 1862–79.” Quarterly Journal of Economics, 36, no. 2 (1922): 220–73.CrossRefGoogle Scholar
John Hickling and Company. Men and Idioms of Wall Street. New York, NY: John Hickling and Company, 1875.Google Scholar
Hundley, Richard, Anderson, Robert, Bikson, Tora, & Neu, Richard. The Global Course of the Information Revolution: Recurring Themes and Regional Variations. Santa Monica, CA: RAND, 2003.Google Scholar
Kairys, Joseph, and Valerio III, Nicholas. “The Market for Equity Options in the 1870s.” Journal of Finance 52, no. 4 (1997): 1707–24.CrossRefGoogle Scholar
Kindleberger, Charles. “The Panic of 1873.” In Crashes and Panics: The Lessons from History, edited by White, Eugene, 69–84. Homewood, IL: Business One Irwin, 1990.Google Scholar
Kindleberger, CharlesManias, Panics, and Crashes: A History of Financial Crises. Fourth Edition. New York: John Wiley & Sons, 2000.CrossRefGoogle Scholar
Macaulay, Frederick. The Movements of Interest Rates, Bond Yields, and Stock Prices in the United States since 1856. New York: NBER, 1938.Google Scholar
McDill, Kathleen, and Sheehan, Kevin. “Sources of Historical Banking Panics: A Markov Switching Approach.” FDIC Working Paper 2006-01 (2006).Google Scholar
Medbery, James K.Men and Mysteries of Wall Street. New York: Fields, Osgood, & Co., 1870.Google Scholar
Merton, Robert. “Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science 4, no. 1 (1973): 141–83.Google Scholar
Merton, Robert“On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance 29, no. 2 (1974): 449–470.Google Scholar
Mishkin, Frederick. “Asymmetric Information and Financial Crises: A Historical Perspective.” In Financial Markets and Financial Crises, edited by Hubbard, R. G., 69–108. Chicago: NBER and University of Chicago Press, 1991.Google Scholar
Mishkin, Frederick“Global Financial Instability: Framework, Events, Issues.” Journal of Economic Perspectives 13, no. 4 (1999): 3–20.CrossRefGoogle Scholar
Mitchell, Wesley C.Gold, Prices & Wages Under the Greenback Standard. New York: Augustus M. Kelley Publishers, 1966 [1908].Google Scholar
Mixon, Scott. “The Derivatives Crisis of 1884.” Financial History 84 (Fall 2005): 28–30, 37.Google Scholar
Neal, Larry, & Weidenmier, Marc. “Crises in the Global Economy from Tulips to Today: Contagion and Consequences.” In Globalization in Historical Perspective, edited by Bordo, Michael, Taylor, Alan, and Williamson, Jeffrey, 473–514. Chicago: NBER and University of Chicago Press, 2003.CrossRefGoogle Scholar
Officer, Lawrence H.“The Floating Dollar in the Greenback Period: A Test of Theories of Exchange-Rate Determination.” This JOURNAL 41, no. 3 (1981): 629–50.Google Scholar
Officer, Lawrence H.“Exchange Rate Between the United States Dollar and the British Pound, 1791–2005.” Economic History Services, EH. Net, (2006). URL: http://eh.net/hmit/exchangerates/pound.phpGoogle Scholar
Parkinson, Michael. “The Extreme Value Method for Estimating the Variance of the Rate of Return.” Journal of Business 53, no. 1 (1980): 61–65.CrossRefGoogle Scholar
Phillips, Peter C. B., & Hansen, Bruce E.. “Statistical Inference in Instrumental Variables Regression with I(1) Processes,” Review of Economic Studies 57 (1990): 99–125.Google Scholar
Rappoport, Peter, & White, Eugene N.. “Was the Crash of 1929 Expected?” American Economic Review 84, no. 1 (1994): 271–81.Google Scholar
Schwert, G. William. “Business Cycles, Financial Crises, and Stock Volatility,” Carnegie-Rochester Conference Series on Public Policy 31 (1989): 83–126.Google Scholar
Simon, Matthew. Cyclical Fluctuations and the International Capital Movements of the United States, 1865–1897. New York: Arno Press, 1978.Google Scholar
Sobel, Robert. Panic on Wall Street. New York: Truman Talley Books, 1988.Google Scholar
Sprague, O.History of Crises Under the National Banking System. Washington, DC: GPO, 1910.Google Scholar
Stock, James, & Watson, Mark. “A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems.” Econometrica 83 (1993): 1097–107.Google Scholar
Studenski, Paul, & Kroos, Herman E.. Financial History of the United States, Second Edition. New York: McGraw-Hill, 1963.Google Scholar
Swain, Henry H.Economic Aspects of Railroad Receiverships. New York: The Macmillan Company, 1898.Google Scholar
Veenendaal, Augustus Jr. Slow Train to Paradise: How Dutch Investment Helped Build American Railroads. Palo Alto, CA: Stanford University Press, 1996.Google Scholar
Zussman, Asaf. “The Rise of German Protectionism in the 1870s: A Macroeconomic Perspective.” manuscript, Cornell University, 2006.Google Scholar