Contagion by shared financial intermediary in the pre-1914 London sovereign debt market

Abstract

This thesis consists of one empirical essay on contagion (co-authored with Joao Manoel Pinho de Mello¹ and Marcelo de Paiva Abreu²). We document a novel type of international financial contagion whose driving force is shared financial intermediation. In the London peripheral sovereign debt market during pre-1914 period financial intermediation played a major informational role to investors, given the absence of international monitoring agencies and substantial agency costs. Using a hand-collected dataset of weekly bond prices and borrower-underwriters relationships in the pre-1914 London market for sovereign debt, we explore two events of financial distress - the Brazilian Funding Loan of 1898 and the Greek Funding Loan of 1893 - as quasi-natural experiments to contagion by shared underwriter. Following the two crises, bond prices of countries that shared the same merchant bank dropped by some 3.5% relative to the rest of the market. This result is true for the mean, median and the whole distribution of bond prices, and robust to an extensive sensitivity analysis. Two theoretical explanations can rationalize this phenomenon: information spillovers and portfolio realignment.