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

Asaf Bernstein, Eric Hughson and Marc Weidenmier

Journal of Political Economy, 2019, vol. 127, issue 2, 689 - 729

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.

Date: 2019
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