Using ARIMA Forecasts to Explore the Efficiency of the Forward Reichsmark Market

We explore the efficiency of the forward reichsmark market in Vienna between 1876 and 1914. We estimate ARIMA models of the spot exchange rate in order to forecast the one-month-ahead spot rate. In turn we compare these forecasts to the contemporaneous forward rate, i.e., the market's forecast of the future spot rate. We find that shortly after the introduction of a "shadow" gold standard in the mid-1890s the forward rate became a considerably better predictor of the future spot rate than during the prior flexible exchange rate regime. Between 1907 and 1914 forecast errors were between a half and one-fourth of their pre-1896 level. This implies that the Austro-Hungarian Bank's policy of defending the gold value of the currency was successful in improving the efficiency of the foreign exchange market

Using ARIMA Forecasts to Explore the Efficiency of the Forward Reichsmark Market: Austria-Hungary, 1876-1914

We explore the efficiency of the forward Reichsmark market in Vienna between 1876 and 1914. We estimate ARIMA models of the spot exchange rate in order to forecast the one-month-ahead spot rate. In turn we compare these forecasts to the contemporaneous forward rate, i.e., the market's forecast of the future spot rate. We find that shortly after the introduction of a "shadow" gold standard in the mid-1890s the forward rate became a considerably better predictor of the future spot rate than during the prior flexible exchange rate regime. Between 1907 and 1914 forecast errors were between a half and one-fourth of their pre-1896 level. This implies that the Austro-Hungarian Bank's policy of defending the gold value of the currency was successful in improving the efficiency of the foreign exchange market

How to Run a Target Zone? Age Old Lessons from an Austro-Hungarian Experiment

This paper considers what we argue was the first experiment of an exchangerate band. This experiment took place in Austria-Hungary between 1896 and1914. The rationale for introducing this policy rested on precisely thoseintuitions that modern target zone literature has recently emphasized: theband was designed to secure both exchange rate stability and monetarypolicy autonomy. However, unlike more recent experiences, such as theERM, this policy was not undermined by credibility problems. In other wordsthe episode provides us with an ideal testing ground for some importantideas in modern macroeconomics: specifically, can formal rules, whenfaithfully adhered to, provide policy makers with some advantages such asshort term flexibility? First, we find that a credible band has a“microeconomic” influence on exchange rate stability. By reducinguncertainty, a credible fluctuation band improves the quality of expectations,a channel that has been neglected in the modern literature. Second, weshow that the standard test of the basic target zone model is flawed anddevelop an alternative methodology. This enables us to understand whyAustro-Hungarian policy makers were so upbeat about the merits ofexchange rate target zones. We believe that these findings shed a new lighton the economics of exchange rate bands.

The Economics of Badmouthing: Libel Law and the Underworld of the Financial Press in France before World War I

This article analyzes the economics of “badmouthing” in the context of the pre-1914 French capital market. We argue that badmouthing was a means through which racketeering journals sought to secure property rights over issuers’ reputation. We provide a theoretical study of the market setup that emerged to deal with such problems, and we test our predictions using new evidence from contemporary sources.badmouthing, capital market, reputation.

Using ARIMA Forecasts to Explore the Efficiency of the Forward Reichsmark Market: Austria-Hungary, 1876-1914

We explore the efficiency of the forward Reichsmark market in Vienna between 1876 and 1914. We estimate ARIMA models of the spot exchange rate in order to forecast the one-month-ahead spot rate. In turn we compare these forecasts to the contemporaneous forward rate, i.e., the market's forecast of the future spot rate. We find that shortly after the introduction of a “shadow†gold standard in the mid-1890s the forward rate became a considerably better predictor of the future spot rate than during the prior flexible exchange rate regime. Between 1907 and 1914 forecast errors were between a half and one-fourth of their pre-1896 level. This implies that the Austro-Hungarian Bank's policy of defending the gold value of the currency was successful in improving the efficiency of the foreign exchange market.exchange rate; gold standard; ARIMA; efficiency

Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities

The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents’ expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a “pure” measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard.Exchange rate regime, gold standard, bimetallism, credibility, silver risk

Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities.

The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents’ expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a “pure” measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard.Exchange rate regime, gold standard, bimetallism, credibility, silver risk

Bonds and Brands : intermediaries and reputation in sovereign debt markets 1820-1830

How does sovereign debt emerge and become sustainable? This paper provides a new answer to this unsolved puzzle. Focusing on the early 19th century, we argue that intermediaries’ market power served to overcome information asymmetries and sustained the development of sovereign debt. Relying on insights from corporate finance, we argue that capitalists turned to intermediaries’ reputations to guide their investment strategies. The outcome was a two-tier global bond market, which was sustained by hierarchical relations among intermediaries. This novel theoretical perspective is backed by new archival evidence and empirical data that have never been gathered so far

Collective Action Clauses before they had airplanes: Bondholder committees and the London Stock Exchange in the 19th Century (1827-1868)

This paper unpacks the operation of foreign debt bondholder committees before the creation of the British Corporation of Foreign Bondholders (CFB) in 1868. I argue that many ideas about this period need to be revisited. In particular, my evidence (which uses archival work to describe market microstructures) shows the importance of the London Stock Exchange as a Court of Arbitration. I show how the LSE General Purpose Committee set up a system of Collective Action Clauses, requiring majority agreement among bondholders to sanction a restructuring deal and permit market access. I argue that (unlike what research has argued thus far) this created powerful incentives for bondholders to get organized as they did. Previous models and formal analyses need to be recast. The CFB appears to have been an experiment in statutory restructurings rather than one in coordination