A common‐features analysis of Amsterdam and London financial markets during the eighteenth century

Abstract

We examine the financial linkage between the London and Amsterdam financial markets using stock prices recorded in each market o¨er the period 1723᎐94 in conjunction with tests for common trends, cycles, and regime shifts. These tests re¨eal a surprising degree of integration between the markets as their prices mo¨e together in both the short and long run. Moreo¨er, shocks to the assets translate quickly and accurately between markets. It also appears that Dutch in¨estment did not destabilize London markets and stock prices in London were the primary Ž . determinant of prices in Amsterdam. JEL F32, G15, N23

Nonlinear integration of London and Amsterdam stock markets in the 1700s

“…Balke and Fomby (1997) state that 'The bottom line is that standard linear methods for examining cointegration seem to work reasonably well for threshold cointegration'. These results that use this newly constructed data set confirms the previous results of Neal (1990) and Dempster et al (2000) who also provided evidence of the tight integrations of the financial markets in London and Amsterdam in the eighteenth century. …”

“…For example, the seminal work by Neal (1987Neal ( , 1990 showed that the financial markets in London and Amsterdam in the 1700s were highly integrated. Dempster et al (2000) confirm Neal's findings using modern econometric techniques. Hoag (2006) showed that information travelled very efficiently between financial markets in London and New York before the installation of the first trans-Atlantic telegraph cable.…”

“…Again, Neal (1987Neal ( , 1990 and Dempster et al (2000) show that London and Amsterdam were integrated, but they used linear methods. This article uses a nonlinear cointegration model based upon threshold autoregression to show that the financial markets in London and Amsterdam in the 1700s exhibited NMR.…”

The Boats That Did Not Sail: Asset Price Volatility in a Natural Experiment

“…Neal relies on daily data for London, but on price data with a frequency of two observations a month for Amsterdam (originally collected by Van Dillen (1931)). Dempster, Wells, and Wills (2000) use Neal's data set to provide more evidence on the integration of the Amsterdam and London capital markets. Harrison (1998) studies the properties of returns in London and Amsterdam (again using Neal's data) and finds that both the shape of the return distributions and the autocorrelation patterns are very similar to those of modern markets.…”