What happened to liquidity when world war I shut the NYSE? |
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Institution: | 1. Research Institute for Economics and Business Administration, Kobe University, 2-1, Rokkodai, Nada, Kobe 657-8501, Japan;2. Institute for Monetary and Economic Studies, Bank of Japan, 2-1-1, Nihonbashi-Hongokucho, Chuo, Tokyo 103-8660, Japan |
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Abstract: | This paper examines how financial markets responded to the longest circuit breaker in American financial history: the four-month suspension of trading on the New York Stock Exchange following the outbreak of World War I. The suspension that began on July 31, 1914 fostered a substitute trading forum called the New Street market. Trading on New Street began almost immediately and offered economically meaningful liquidity services despite its impaired price transparency. A simple cross-sectional model of bid–ask spreads on New Street demonstrates that New Street liquidity responded to economic incentives. New Street's success implies that, from a public policy perspective, expensive back-up trading facilities are not required to preserve liquidity during a trading suspension in established markets. Back-up records of share ownership and transfer facilities, however, are crucial to maintaining liquidity. |
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