Bullion, bills and arbitrage: exchange markets in fourteenth- to seventeenth century Europe

Abstract

Two drawbacks of current empirical studies on late medieval financial market integration are: the use of low frequency data; and the lack of a benchmark for comparison. As a result, there is a tendency to underestimate the degree of integration and one has no clear idea about whether the estimated degree of integration is high or low by the standards of the time. Consequently, there is not yet a satisfactory answer as to how integrated and efficient financial markets were in the late Middle Ages and early modern era. In tackling these two problems, this thesis employs monthly and weekly exchange rates to measure the degree of exchange market integration and the results are judged using the speed of communication as a benchmark since the flow of information played a critical role in financial arbitrage. Therefore, this thesis is able to show that exchange markets were already well integrated in the late fourteenth century. From then to the late seventeenth century, the high speed of adjustment to profitable opportunities was maintained, but the transaction costs associated with arbitrage fell over time. The reduction in transaction cost may be attributed to the financial innovations that took place in the sixteenth century. This thesis also finds that the type of information related to shocks received by economic agents had a decisive impact on the speed of price adjustment. The more explicit the information, the more efficiently the market responded to shocks