Proposal preview

The Webs of Shadow. Financial networks during the First Globalization

Networks were crucial in the first wave of globalization (1870-1913). The conquest of distance was possible thanks to increasingly redundant networks of transportation (railways, shipping lines) and communication (mail and telegraph). Likewise, the dramatic rise in financial flows in the later quarter of the 19h century required innovative technologies to acquire information and pool risk across industries and continents. Many of these depended on networks, such as news agencies, credit ratings agencies, currency trading, multinational banks and banking syndicates. Less appreciated in the literature is the fact that networks generate externalities, which can influence behaviour in ways that are difficult to capture in models that assume agents act independently. This setting raises a threat to identification in classical regression analysis. This session contributes to a budding literature that explicitly models financial links as part of a network of interdependent relations by drawing on recent methodological developments in network analysis.

Organizer(s)

  • Rui Esteves University of Oxford rui.esteves@economics.ox.ac.uk UK
  • Florian Ploeckl University of Adelaide florian.ploeckl@adelaide.edu.au Australia

Session members

  • Olivier Accominotti, LSE
  • Delio Lucena, University of Toulouse - Capitole
  • Stefano Ugolini, Univ Toulouse - Capitole
  • Ling-Yu Kong, University of Adelaide
  • Emily Tang, LSE
  • D'Maris Coffman, UCL
  • John Landon Lane, Rutgers
  • Ali Kabiri, Buckingham
  • Michael Bordo, Rutgers
  • Antoine Parent, Sciences-PO
  • Marc Weidenmier, Claremont McKenna
  • ,

Discussant(s)

Papers

Panel abstract

Networks were crucial in the first wave of globalization (1870-1913). The conquest of distance was possible thanks to increasingly redundant networks of transportation (railways, shipping lines) and communication (mail and telegraph). Likewise, the dramatic rise in financial flows in the later quarter of the 19h century required innovative technologies to acquire information and pool risk across industries and continents. Many of these depended on networks, such as news agencies, credit ratings agencies, currency trading, multinational banks and banking syndicates. Less appreciated in the literature is the fact that networks generate externalities, which can influence behaviour in ways that are difficult to capture in models that assume agents act independently. This setting raises a threat to identification in classical regression analysis. This session contributes to a budding literature that explicitly models financial links as part of a network of interdependent relations by drawing on recent methodological developments in network analysis.

1st half

Gold and Trade: An empirical simulation approach

Esteves Rui, Ploeckl Florian

The network externalities from international trade to the choice of exchange rate regimes have been invoked to explain the rise of the classical gold standard. In particular, gravity regressions have consistently shown large trade gains for countries on the same monetary regime (especially gold). However, causality probably runs in both directions, since more open economies had a greater incentive to adopt stable exchange rate regimes, especially if they traded more with other countries on gold. This raises an endogeneity issue for which conventional identification methods are not suitable. This paper uses empirical network analysis to model the co-evolution of trade and exchange rate regimes. Simulations of this evolution indicate the presence of a selection effect, with monetary regimes influencing trade on the intensive margin; and of a contagion effect, as the monetary regimes of trade partners shaped countries' decisions to change their regime.

The network externalities from international trade to the choice of exchange rate regimes have been invoked to explain the rise of the classical gold standard. In particular, gravity regressions have consistently shown large trade gains for countries on the same monetary regime (especially gold). However, causality probably runs in both directions, since more open economies had a greater incentive to adopt stable exchange rate regimes, especially if they traded more with other countries on gold. This raises an endogeneity issue for which conventional identification methods are not suitable. This paper uses empirical network analysis to model the co-evolution of trade and exchange rate regimes. Simulations of this evolution indicate the presence of a selection effect, with monetary regimes influencing trade on the intensive margin; and of a contagion effect, as the monetary regimes of trade partners shaped countries' decisions to change their regime.

A Network Analysis of Financial Globalization: 1885-2017

Bastidon Cecile, Bordo Michael, Parent Antoine, Weidenmier Marc

We propose a network analysis of financial globalization (1885-2017 for 16 countries) using the econophysics literature on equity markets. In a first step we identify distortions of the network configuration over time. This leads us to a segmentation into four subperiods, close to the usual taxonomy of monetary regimes (first era of globalization, interwar, early second era [1945-1980], late second era [1980-2017]). In a second step we analyse the networks themselves and the evolution of the dominant countries of the sample. The contribution is threefold. First, the first era is mainly characterized by rising integration with neighboring countries only, meaning that integration would not be equivalent to full globalization. Secondly, the crises of 1929 and 2008 are both characterized by increasing integration. Finally, the late second era is highly atypical because of increasing instability in connectivity, and thus the structure of the network.

We propose a network analysis of financial globalization (1885-2017 for 16 countries) using the econophysics literature on equity markets. In a first step we identify distortions of the network configuration over time. This leads us to a segmentation into four subperiods, close to the usual taxonomy of monetary regimes (first era of globalization, interwar, early second era [1945-1980], late second era [1980-2017]). In a second step we analyse the networks themselves and the evolution of the dominant countries of the sample. The contribution is threefold. First, the first era is mainly characterized by rising integration with neighboring countries only, meaning that integration would not be equivalent to full globalization. Secondly, the crises of 1929 and 2008 are both characterized by increasing integration. Finally, the late second era is highly atypical because of increasing instability in connectivity, and thus the structure of the network.

The Origination and Distribution of Money Market Instruments: Sterling Bills of Exchange During the First Globalization

Accominotti Olivier, Lucena Delio, Ugolini Stefano

This paper presents a detailed analysis of how liquid money market instruments – sterling bills of exchange - were originated during the First Globalization. We rely on a unique dataset constructed from a previously unexploited archival source reporting systematic information on all bills rediscounted by the Bank of England in the year 1906. Using network analysis, we reconstruct the complete network of linkages between agents involved in the origination of London bills. Sterling bills always involved a “drawer” (a borrower in a foreign country), an “acceptor” (a London firm who guaranteed the bill’s payment), and a “discounter” (an ultimate lender). Our analysis reveals that acceptors/guarantors played a crucial role in solving the informational problem between lenders and borrowers. This ensured that risky private debts could be transformed into highly liquid monetary instruments, a function that was crucial to the position of London as the world’s leading international financial center.

This paper presents a detailed analysis of how liquid money market instruments – sterling bills of exchange - were originated during the First Globalization. We rely on a unique dataset constructed from a previously unexploited archival source reporting systematic information on all bills rediscounted by the Bank of England in the year 1906. Using network analysis, we reconstruct the complete network of linkages between agents involved in the origination of London bills. Sterling bills always involved a “drawer” (a borrower in a foreign country), an “acceptor” (a London firm who guaranteed the bill’s payment), and a “discounter” (an ultimate lender). Our analysis reveals that acceptors/guarantors played a crucial role in solving the informational problem between lenders and borrowers. This ensured that risky private debts could be transformed into highly liquid monetary instruments, a function that was crucial to the position of London as the world’s leading international financial center.

2nd half

A peripheral hub of globalisation: local interest groups, global capitalists and foreign investment decisions in Naples (1800-1913). A network approach.

Schisani M., Balletta L., Giordano G., Ragozini G., Vitale M.

Being at the crossroad of international financial interests, Southern Italy and Naples were integrated into changing global financial networks during the 19th century. Italy’s Unification in 1861 marked the transition from the closed system of the protectionist Bourbon monarchy to the trade and capital openness of the new Italian liberal governments. We study the interactions between local interest groups and global financial actors by exploiting a newly-built database on the Naples business and institutional structure between 1812 and 1913. By using Social Network Analysis techniques, applied to weighted two-mode and one-mode temporal networks, we identify the interest groups through proper community detection algorithms and verify how the network of interdependencies and power relations between local and foreign actors (individuals and firms) changed over the 1861 institutional breakpoint. Moreover, we evaluate the effect of the externalities generated by the network structure on the decisions of foreign capitalists to invest in Naples.

Being at the crossroad of international financial interests, Southern Italy and Naples were integrated into changing global financial networks during the 19th century. Italy’s Unification in 1861 marked the transition from the closed system of the protectionist Bourbon monarchy to the trade and capital openness of the new Italian liberal governments. We study the interactions between local interest groups and global financial actors by exploiting a newly-built database on the Naples business and institutional structure between 1812 and 1913. By using Social Network Analysis techniques, applied to weighted two-mode and one-mode temporal networks, we identify the interest groups through proper community detection algorithms and verify how the network of interdependencies and power relations between local and foreign actors (individuals and firms) changed over the 1861 institutional breakpoint. Moreover, we evaluate the effect of the externalities generated by the network structure on the decisions of foreign capitalists to invest in Naples.

The Determinants of Sovereign Borrowing During Two Decades of Nation Building: A Fresh Look with Higher Frequency Data

Landon Lane John, Kabiri Ali, Husain Tehreem, Coffman D’Maris

Building on previous studies by Mauro, Sussman and Yafeh (2006) and Bordo (1995) about the relative contributions of political risk and institutional contexts to sovereign bond spreads, this paper employs the under-used Money Market Review as a source to extend the analysis back to 1860 (rather than starting in the 1870s) and to introduce higher frequency data (weekly rather than monthly). We argue our approach is an improvement over studies that rely on the monthly sources which report opening or closing bond prices, when news events can occur anywhere during a given month. Our paper deals directly with the historical contexts of the American Civil Wars, Italian Unification, Russian reforms (Emancipation of the Serfs), German Unification, etc., which are revolutionary and thus different from the political instability experienced by major powers post-1873. We find that in the 1860s war is not the only or best predictor of sovereign bond spreads.

Building on previous studies by Mauro, Sussman and Yafeh (2006) and Bordo (1995) about the relative contributions of political risk and institutional contexts to sovereign bond spreads, this paper employs the under-used Money Market Review as a source to extend the analysis back to 1860 (rather than starting in the 1870s) and to introduce higher frequency data (weekly rather than monthly). We argue our approach is an improvement over studies that rely on the monthly sources which report opening or closing bond prices, when news events can occur anywhere during a given month. Our paper deals directly with the historical contexts of the American Civil Wars, Italian Unification, Russian reforms (Emancipation of the Serfs), German Unification, etc., which are revolutionary and thus different from the political instability experienced by major powers post-1873. We find that in the 1860s war is not the only or best predictor of sovereign bond spreads.

Financial Integration in Late Imperial China - Social Economic Impact on Capital Markets

Tang Emily

This paper looks into the overall integration among multiple financial markets in 66 years scattered over the Ming-Qing period (1368-1910) of China. Using spatial integration methods, it finds that the financial integration can be explained by education, population and the relative position of the market to all other markets. Education played a significant role here, probably by cultivating the human capital pool required by financial development. However, due to uneven development of the national economy and transactional cost, capital arbitrage was not efficient enough to fill in the gaps and boost integration. There was barely evidence of financial integration until the Late Qing period. Neither land nor war is statistically significant, hence not much impact from the rural sector or political stability on the capital markets.

This paper looks into the overall integration among multiple financial markets in 66 years scattered over the Ming-Qing period (1368-1910) of China. Using spatial integration methods, it finds that the financial integration can be explained by education, population and the relative position of the market to all other markets. Education played a significant role here, probably by cultivating the human capital pool required by financial development. However, due to uneven development of the national economy and transactional cost, capital arbitrage was not efficient enough to fill in the gaps and boost integration. There was barely evidence of financial integration until the Late Qing period. Neither land nor war is statistically significant, hence not much impact from the rural sector or political stability on the capital markets.