“High & Dry”: The Liquidity and Credit of Colonial and Foreign Government Debt and the London Stock Exchange (1880–1910)

Abstract

We gather a new database to conduct the first historically informed study of the importance of liquidity and credit for government bonds between 1880 and 1910. We argue that colonial and sovereign debt markets were segmented owing to differences in underlying information asymmetries. The result was heterogeneous pricing of colonial and sovereign debt, and different market microstructures and clienteles, themselves influenced by political, institutional, and financial arrangements. We find that sovereign spreads mainly reflected credit risks, while colonial spreads mainly reflected liquidity risks. Liquidity premia were economically large and significant, contributing between 10 percent and 39 percent of colonial spreads. These findings help understanding why the seemingly dry subject of colonial illiquidity inspired passionate disputes and ground-breaking reforms of financial imperial institutions.

Share trading activity and the rise of the rentier in the UK before 1920*

“…This paper augments this literature by examining the effect of this rise upon share trading. In a similar vein to this paper, Chavaz and Flandreau (2017) suggest that clientele effects affected the liquidity of colonial and foreign bonds in the period 1880 to 1910.…”

“…However, these middle-class rentiers may have been buy-and-hold investors who held a diversified portfolio and subsequently traded infrequently, with the result that trading activity was dampened by the emergence of this new breed of investor. Notably, Chavaz and Flandreau (2017) suggest that there was a close connection between the liquidity of colonial government bonds and the types of investors in such bonds. We therefore investigate in this paper whether, in the instance of our case-study company, the rise of rentiers adversely affected share trading activity.…”

Independence and the Effect of Empire

“…Regressions are therefore run using variables' first difference. Chavaz and Flandreau (2017) have recently expanded this model to take a potential liquidity premium into account: Since our main focus is on the interwar period our liquidity variables are limited to this period, we therefore compare baseline results with the pre-war period without taking liquidity into account but we include it in all subsequent analyses on the interwar period. Liquidity is defined as in Alquist (2010) as the relative bid-ask spread:…”

“…Before the war, the spreads across countries were relatively similar. Chavaz and Flandreau (2017) have argued that these spreads mainly reflected liquidity risk. But the difference 0.00% 1 9 0 0 1 9 0 2 1 9 0 4 1 9 0 6 1 9 0 8 1 9 1 0 1 9 1 2 1 9 1 4 1 9 1 6 1 9 1 8 1 9 2 0 1 9 2 2 1 9 2 4 1 9 2 6 1 9 2 8 1 9 3 0 1 9 3 2 1 9 3 4 1 9 3 6 0.50% observed after the war can hardly be linked to liquidity as Indian bonds were one of the most liquid assets on the British markets (and certainly more liquid than bonds issued by Ceylon).…”

Feeling the blues Moral hazard and debt dilution in Eurobonds before 1914

“…Nevertheless, we show that guaranteed bonds of these countries were perceived differently in the market from other colonial issues, in that they were not priced entirely on the fiat of the colonial power. Colonial issues were more than guaranteed by the coloniser, as the latter reserved complete control over colonial finances (Accominotti et al 2010, Chavaz andFlandreau 2015). A different category of bonds were those issued under the financial (and sometimes political) control of foreign creditors, where the latter controlled the domestic sources of revenue set aside to service the foreign debt (Mitchener andWeidenmier 2010, Tuncer 2015).…”