Price discovery in the 18th Century

New research by Professor Adrian Bell, Chris Brooks (both of the ICMA Centre, Henley Business School) and Nick Taylor (of the University of Bristol) has been published in Cliometrica: The Journal of Historical Economics and Econometric History.

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
Adrian is Chair in the History of Finance and Research Dean, Prosperity and Resilience.

Professor Chris Brooks

Professor in Finance
Chris Brooks is Professor of Finance at the ICMA Centre. He was formerly Professor of Finance at the Cass Business School, London. He holds a PhD and a BA in Economics and Econometrics, both from the University of Reading. His areas of research interest include asset pricing, fund management, behavioural...
Published 3rd February 2015
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