Skip to main content

Price discovery in the 18th Century

The journal specialises in original research that focuses upon the use of modern economic theory and econometric techniques to investigate historical issues.

The paper titled 'Price discovery in the 18th Century' combines the methodological approaches of modern finance and historical analysis, to investigate the time-varying nature of price discovery – the process by and the speed with which, new information is reflected in the prices of traded assets – in eighteenth century cross-listed stocks.

Specifically, the work investigates how quickly news was impacted in share prices for two of the ‘great moneyed companies’, the Bank of England and the East India Company, over the period 1723 to 1794.

These British companies were cross-listed on the London and Amsterdam stock exchanges and news between the capitals flowed mainly via the use of boats that sailed up to twice per week transporting mail. The study examines in detail the historical context surrounding the defining events of the period, and uses these as a guide to how the data should be analysed.

The research shows that both trading venues contributed to price discovery, and that although the London venue was more important for these stocks, Amsterdam also played an increasing role.

The results of this research demonstrates that despite communication being delayed between the two financial centres (and being tricky especially during periods of warfare and economic uncertainty), price differentials would disappear so that prices returned to equilibrium quickly, and any arbitrage opportunities would therefore swiftly disappear.

The study is also able to show that the prices of these early examples of cross-listed stocks incorporated information from both listing venues despite operating in a period of great political and financial turbulence.

Professor Adrian Bell, head of the ICMA Centre, stated "These findings offer an important wider implication; that financial markets do not require modern forms of immediate electronic communication or a highly developed regulatory framework in order to function effectively."

Professor Adrian Bell

Research Dean, Prosperity and Resilience
Published 3 February 2015
Topics:
Research news

You might also like

Insights into Environmental, Social and Governance (ESG) investing by Neil Brown

2 February 2015
Neil has worked in investment for 13 years. Before joining Alliance Trust Investments in August 2001, Neil spent 4 years at Aviva Investors where, most recently, he was an SRI Fund Manager.

A Guide to Best Practice in the European Repo Market

6 March 2014
The ICMA have just published a guide to best practice in the European Repo Market.This important document was written by Richard Comotto, Senior Visiting Fellow at the ICMA Centre for the ICMA's European Repo Council. It represents the most comprehensive set of recommendations for trading and settlement, and codification of market conventions, in any repo market and is likely to provide a model to other markets. It will also be an essential aide to researchers, commentators and policy-makers.

New Blog: #BalanceforBetter: The Case and Choice of Flexible Working

8 March 2019
What could a flexible workplace offer to its employees? Dr Miriam Marra discusses previous research on flexible working and working remotely.