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

Asaf Bernstein, Eric Hughson and Marc Weidenmier ()

No 20459, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Heightened counterparty risk during the recent financial crisis has raised questions about the role clearinghouses play in global financial stability. Empirical identification of the effect of centralized clearing on counterparty risk is challenging because of the co-incidence of macro-economic turbulence and the introduction of clearinghouses. We overcome these concerns by examining a novel historical experiment, the establishment of a clearinghouse on the New York Stock Exchange (NYSE) in 1892. During this period the largest NYSE stocks were also 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 clearing reduced annualized volatility of NYSE returns by 90-173bps and increased asset values. Prior to clearing, shocks to overnight lending rates reduced the value of stocks on the NYSE, relative to identical stocks on the CSE, but this was no longer true after the establishment of clearing. We also show that at least ½ of the average reduction in counterparty risk on the NYSE is driven by a reduction in contagion risk - the risk of a cascade of broker defaults. Our results indicate that clearing can cause a significant improvement in market stability and value through a reduction in network contagion and counterparty risk.

JEL-codes: G0 G01 G1 G12 G18 G2 G23 G28 N0 N2 N21 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-his and nep-lab
Note: AP CF DAE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published as Asaf Bernstein & Eric Hughson & Marc Weidenmier, 2019. "Counterparty Risk and the Establishment of the New York Stock Exchange Clearinghouse," Journal of Political Economy, vol 127(2), pages 689-729.

Downloads: (external link)
http://www.nber.org/papers/w20459.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:20459

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w20459

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().