Marc D. Weidenmier

Turning Points in the U.S. Civil War: Views from the Grayback Market

This article introduces a new high-frequency time series of Confederate money prices taken from the newspapers of Richmond and leading cities in the Eastern Confederacy. The new grayback series is tested for turning points. The empirical analysis suggests that turning points in the Confederate grayback market were different from those identified in the Northern greenback market by. It appears that war did not always have symmetric effects on Northern and Southern money prices.

The Baring Crisis and the Great Latin American Meltdown of the 1890s

The Baring Crisis is the nineteenth centurys most famous sovereign debt crisis. Few studies, however, have attempted to understand the extent to which the crisis mattered for countries other than Argentina and England. Using a new database consisting of more than 15,000 observations of weekly sovereign debt prices, we assess the extent to which the Barings Crisis affected other emerging market borrowers and find empirical evidence of a regional crisis. We find that Latin American yield spreads increased by more than 200 basis points during the crisis relative to the rest of the world, even after controlling for macroeconomic, trade, political-institutional factors, and other country-specific effects. Our evidence suggests that European investors may have sold off or reduced their holdings of Latin American securities in the wake of the Baring Crisis.

Covered Interest Arbitrage: Then versus Now

We introduce a new weekly database of spot and forward US-UK exchange rates as well as interest rates to examine the integration of forward exchange markets during the classical gold standard period (1880-1914). Using threshold autoregressions (TAR), we estimate the transactions cost band of covered interest differentials (CIDs) and compare our results to studies of more recent periods. Our findings indicate that CIDs for the US-UK rate were generally larger during the classical gold standard than any period since. We argue that slower information and communications technology during the gold standard period led to fewer short-term financial flows, higher transactions costs, and larger CIDs.

Was the Classical Gold Standard Credible on the Periphery? Evidence from Currency Risk

We use a standard metric from international finance, the currency risk premium, to assess the credibility of fixed exchange rates during the classical gold standard era. Theory suggests that a completely credible and permanent commitment to join the gold standard would have zero currency risk or no expectation of devaluation. We find that, even five years after a typical emerging-market country joined the gold standard, the currency risk premium averaged at least 220 basis points. Fixed- effects, panel-regression estimates that control for a variety of borrower-specific factors also show large and positive currency risk premia. In contrast to core gold standard countries, such as France and Germany, the persistence of large premia, long after gold standard adoption, suggest that financial markets did not view the pegs in emerging markets as credible and expected devaluation.

Political Connections and Accounting Quality Under High Expropriation Risk

Abstract We examine the impact of political connections and accounting quality among Venezuelan industrial firms, which face one of the highest levels of expropriation risk worldwide. Based on prior literature, we expect a negative relationship between expropriation risk and accounting quality as firms manage earnings to avoid ‘benign’ state intervention. We find that politically connected firms have higher accounting quality than non-connected firms, which is consistent with connected firms’ lower risk of expropriation due to connections with high-level government officials or ruling party members. The relationship between accounting quality and political connections appears to be strongly moderated by institutional features like expropriation risk.

What Makes Uninformed Traders Tick

Using New York Stock Exchange ticker subscriptions, we find that the dissemination of market prices by the stock ticker strengthens return predictability and momentum by stimulating uninformed trading. Variation in ticker subscriptions is not explained by population growth, economic growth, or market returns. Instead, lower operating costs for a stock ticker increase ticker subscriptions and strengthen momentum. Higher idiosyncratic return volatility and lower systematic risk are also associated with an increase in ticker subscriptions. Therefore, the dissemination of firm-level market prices induces a trade-off between price efficiency and systematic risk.

A First Look at BREXIT and Global Equity Markets

Global equity markets experienced a significantly negative return of over 4.7 percent on June 24, 2016 in response to news of Britain’s decision (BREXIT) to leave the European Union. Stock market indices for members of the European Union were hard hit with nearly all experiencing significantly negative additional abnormal returns. Large economies such as Germany, Britain and France experienced abnormal returns of -3 to -4.2 percent while the so-called PIIGS: Portugal, Ireland, Italy, Greece, and Spain fared even worse, experiencing abnormal returns of up to negative 10 percent (Greece). We find positive abnormal returns in some BRICS nations.

Does Greater Access to Stock Prices Lower Price Efficiency

Using New York Stock Exchange ticker subscriptions, we find that the dissemination of market prices by the stock ticker strengthens return predictability and momentum by stimulating uninformed trading. Variation in ticker subscriptions is not explained by population growth, economic growth, or market returns. Instead, lower operating costs for a stock ticker increase ticker subscriptions and strengthen momentum. Higher idiosyncratic return volatility and lower systematic risk are also associated with an increase in ticker subscriptions. Therefore, the dissemination of firm-level market prices induces a trade-off between price efficiency and systematic risk.

The Impact of Market Price Dissemination on Price Efficiency and Systematic Risk

Using New York Stock Exchange ticker subscriptions, we find that the dissemination of market prices by the stock ticker strengthens return predictability and momentum by stimulating uninformed trading. Variation in ticker subscriptions is not explained by population growth, economic growth, or market returns. Instead, lower operating costs for a stock ticker increase ticker subscriptions and strengthen momentum. Higher idiosyncratic return volatility and lower systematic risk are also associated with an increase in ticker subscriptions. Therefore, the dissemination of firm-level market prices induces a trade-off between price efficiency and systematic risk.

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

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.