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The Liquidity of the London Capital Markets, 1825-70

Journal: Economic History Review

Date: 20180801

Author: Campbell, Gareth; Turner, John D.; Ye, Qing

Abstract:
This article examines the liquidity of the London capital markets in the decades following the liberalization of UK incorporation law. Using comprehensive stock and bond data, we calculate a measure of market liquidity for the period 1825-70. We find that stock market liquidity trended upwards but bond market liquidity did not increase over the sample period. Stock market liquidity during our sample period was partially influenced by the bond market, rather than fluctuations in economic output. In our analysis of the cross-sectional determinants of individual stock liquidity, we find that firm size and the number of issued shares were important determinants of liquidity. Finally, we find little evidence of an illiquidity premium, which is consistent with the view that investors did not price liquidity in this nascent market.

Link: Google Scholar

Background and Context

Time Period

This study examines the London capital markets during a pivotal growth period from 1825-1870, following the liberalization of UK incorporation law.

Data Sources

Analysis uses comprehensive data from the Course of the Exchange for stocks and Global Financial Data for bonds traded on the London Stock Exchange.

Methodology

Liquidity is measured as the proportion of months with non-zero returns over a year for each security to analyze market development and trading patterns.

Rising Stock Market Liquidity vs Stable Bond Market Liquidity (1825-1870)

  • Stock market liquidity showed strong upward trend while bond market liquidity remained relatively stable
  • Bond market liquidity was generally higher than stock market liquidity throughout the period
  • The liquidity gap between stocks and bonds narrowed significantly by 1870

Railway Sector Led Stock Market Liquidity (1825-1870)

  • Railways consistently showed higher liquidity compared to other sectors
  • Banking sector maintained the second highest liquidity levels
  • Infrastructure and canal sectors showed declining liquidity over time

Market Size and Share Numbers Drive Stock Liquidity

  • Average market capitalization increased over threefold from £264,348 in 1825 to £859,042 in 1865
  • Number of shares tripled from 8,328 in 1825 to 26,617 in 1865
  • Larger firms with more shares showed consistently higher liquidity

Government Bonds Maintained Highest Liquidity Levels

  • UK government bonds showed consistently highest liquidity at 0.847 average
  • Foreign government bonds had second highest liquidity at 0.671
  • Corporate bonds showed lower but stable liquidity levels around 0.568

New Listings Show Higher Initial Liquidity

  • Newly listed stocks showed higher average liquidity (0.511) compared to existing stocks (0.455)
  • Delisting stocks maintained relatively high liquidity (0.466) before exit
  • Pattern suggests active trading around new listings and delistings

Contribution and Implications

  • First comprehensive study of London market liquidity in the critical 1825-1870 period of market development
  • Demonstrates that market growth was driven by evolution in stock characteristics rather than macroeconomic factors
  • Shows that investors did not price liquidity risk, suggesting a buy-and-hold investment culture

Data Sources

  • Liquidity trends chart based on Table 2 average liquidity data by sector and year
  • Sector comparison chart uses mean values from Table 2 bottom row
  • Market size chart constructed from Table 4 summary statistics
  • Bond type comparison based on Table 2 bond liquidity averages
  • New listings chart created from Table 3 mean liquidity values