Foreshadowing LTCM: the crisis of 1763

Isabel Schnabel and Hyun Song Shin

No 02-46, Papers from Sonderforschungsbreich 504

Abstract: The financial crisis that swept across northern Europe in 1763 bears an uncanny resemblance to more recent episodes of financial market turbulence - in particular, to the events of autumn 1998 when mature financial markets were caught in a severe liquidity crisis, culminating in the near collapse of Long-Term Capital Management. We highlight the salient features of the 1763 crisis, propose a stylized model of the events, and draw parallels between the events of 1763 and 1998. Whilst the financial landscape has changed fundamentally in the intervening two hundred or so years, the policy lessons have a resonance that transcend this gap in time. The potentially devastating effects of liquidity risk, the limits to hedging and financial engineering, and the importance of timely crisis management by the authorities are all lessons that have currency today as they did in 1763.

Date: 2002
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Citations: View citations in EconPapers (6)

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Working Paper: Foreshadowing LTCM: The Crisis of 1763 (2001)
Working Paper: Foreshadowing LTCM: The Crisis of 1763 (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:mnh:spaper:2784

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