Completing Markets With Contracts: Evidence From the First Central Clearing Counterparty

Guillaume Vuillemey ()
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Guillaume Vuillemey: HEC Paris - Ecole des Hautes Etudes Commerciales

Working Papers from HAL

Abstract: I study a contracting innovation that suddenly insulated traders of hedging contracts against counterparty risk: central clearing counterparties (CCPs) for derivatives. The first CCP was created in Le Havre (France) in 1882, in the coffee futures market. Using triple difference-in-differences estimation, I show that central clearing changed the geography of trade flows Europe-wide, to the benefit of Le Havre. Inspecting the mechanism using trader-level data, I find that the CCP solved both a "missing market" problem and adverse selection issues. Central clearing also facilitated entry of new traders in the market. The successful contracting innovation quickly spread to other exchanges.

Date: 2019-08-05
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-02895947

DOI: 10.2139/ssrn.3247551

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