Please rotate your device to landscape mode to view the charts.

Integration between the London and New York Stock Exchanges, 1825-1925

Journal: Economic History Review

Date: 20171101

Author: Campbell, Gareth; Rogers, Meeghan

Abstract:
In this article the integration between the London and New York Stock Exchanges is analysed during the era when they were still developing as asset markets. The domestic securities on both exchanges showed little sustained integration, even when controlling for the different characteristics of stocks, which implies that the pricing of securities in the US and UK was still being driven by local factors. These results place a limit on the view that the pre-First World War period was the first era of globalization in terms of capital markets. However, there was considerable integration between New York and those listings on London that operated internationally. This suggests that the listing of foreign securities may be one of the primary mechanisms driving asset market integration.

Link: Google Scholar

Background and Context

Time Period & Scope

The study examines integration between the London and New York Stock Exchanges from 1825-1925, during their formative development period as major financial centers.

Historical Context

This era saw stable exchange rates under the gold standard, high capital mobility, and major advances in communications including the 1866 transatlantic telegraph cable.

Methodology

Analysis of several thousand securities using monthly data to examine integration through domestic stocks, characteristic-based factors, foreign listings, and cross-listed securities.

Growth in Market Size Shows London's Early Dominance

  • Shows the total market capitalization and number of securities in London vs New York in 1903 and 1925
  • London maintained larger total market cap but New York had fewer, larger companies
  • Demonstrates the exchanges' relative scale and different listing approaches

Limited Integration Between Domestic UK and US Stocks

  • Shows R-squared values from integration analysis during peak and trough periods
  • Very low R-squared values (0.02-0.25) indicate minimal integration between domestic stocks
  • Integration levels fluctuated rather than showing consistent increase over time

Dramatic Rise in US Companies Listed on LSE

  • Tracks US companies' share of LSE market capitalization from 1825-1925
  • Shows dramatic increase from near zero to ~40% by 1915
  • Demonstrates growing international integration through cross-border listings

Strong Integration of Cross-Listed Securities

  • Shows R-squared values for cross-listed securities between exchanges
  • Very high R-squared values (60-90%) indicate strong price integration
  • Demonstrates efficient pricing of identical assets across markets

Integration Through Different Mechanisms Over Time

  • Compares R-squared values across different integration mechanisms
  • Shows international listings provided strongest integration channel
  • Illustrates evolution from isolated markets to integrated international trading

Contribution and Implications

  • Challenges view of pre-WWI period as first era of globalized capital markets by showing limited integration of domestic securities
  • Demonstrates international listings were key mechanism for market integration rather than macro factors like gold standard
  • Suggests modern market integration driven by rise of multinational firms rather than market infrastructure

Data Sources

  • Market size visualization based on Table 1 comparing exchange statistics
  • Integration analysis based on Table 4 showing peaks and troughs in synchronicity
  • US listings trend based on Figure 5 showing market value proportions
  • Cross-listed securities analysis based on Table 10 correlation statistics
  • Integration mechanisms comparison based on Tables 5-8 regression results