The Integration and Efficiency of the Scandinavian Foreign Exchange Market 1873-1914: A Quantitative Analysis

This paper applies theories and methods from modern economics and finance to new sets of historical financial data in order to study the integration and efficiency of the Scandinavian foreign exchange market. Series of the monthly prices of sight sterling bills have been collected and subjected to statistical testing. The results clearly indicate that the degree if integration increased dramatically during the period 1879-1914. The price differentials recorded among the, geographically separated, national sub markets for this identical asset decreased substantially. It is clear that market integration took a giant step forward after the establishment of the Scandinavian clearing mechanism in 1885. This study provides the first empirical evidence that the clearing mechanism actually had the effect predicted by theory. The question of market efficiency was also addressed in this paper. It concludes that the undoubted progress towards market integration eliminated all systematic patterns in the price differences among the national Scandinavian sub markets. In other words, the over all Scandinavian foreign exchange market was efficient during most of this period.