DOUGLAS T. WILLS [*]
We examine the financial linkage between the London and Amsterdam financial markets using stock prices recorded in each market over the period 1723-94 in conjunction with tests for common trends, cycles, and regime shifts. These tests reveal a surprising degree of integration between the markets as their prices move together in both the short and long run. Moreover, shocks to the assets translate quickly and accurately between markets. It also appears that Dutch investment did not destabilize London markets and stock prices in London were the primary determinant of prices in Amsterdam. (JEL F32, G15, N23)
If one were to lead a stranger through the streets of Amsterdam and ask him where he was, he would answer, 'Among speculators,' for there is no corner [in the city] where one does not talk shares.
Joseph de la Vega, 1688
During the 1700s, the distance between London and Amsterdam was three days travel. Yet the vagaries of wind, sea, and sail often increased this distance to six days or more. Despite these ancient impediments to the flow of information, which saw no technological improvements over the eighteenth century, this article demonstrates that the financial link between these two cities was extremely modern.
The issues surrounding this financial linkage were also extremely modern and can be viewed in the context of the recent turmoil in Mexico and Asia. In England of the 1700s, as in our economies of today, it was common for foreign investors to be blamed for dramatic movements in domestic currencies and stock markets. Since arbitrage and speculation between London and Amsterdam was not hindered by capital controls, taxes on dividends, or monetary upheavals at least until the Napoleonic Wars, Dutch investment in English assets grew to tremendous levels. This generated considerable domestic concern over the effects and appropriateness of these international capital flows and fear that such flows destabilized financial markets. Many great economists of the day, such as Jeremy Bentham, David Hume, Adam Smith, and James Steuart, addressed these issues in their writings.
More recent work has also addressed Dutch investment in Britain, without reaching any clear conclusions on its effects. Carter  maintains that the Dutch investor was passive and did not respond to price differences between the markets. Ashton  attributes several London financial panics to Dutch speculation, whereas Carruthers [19961 and Mirowski [1981; 1987] argue that the London market was inefficient. These topics are also addressed in the important work of Neal  and Eagly and Smith  as well as the historical analyses in Riley  and Wilson .
At issue here is the degree to which Dutch speculation can be regarded as active and/or destabilizing. More generally, the causal linkage between the two markets has never been established. These same issues are at the forefront of the economic and development discussions of today, and we attempt to shed light on them by examining a period when two markets were allowed to interact without the governmental interference that characterizes current capital markets. Using the prices of stocks traded simultaneously on both the London and Amsterdam exchanges from 1723 to 1794 in conjunction with recent econometric advances to detect common features and regime shifts between the two markets, we find a level of financial integration that rivals that of our present information age. In particular, the prices of Bank of England (BOE), East India Co. (EIC), and South Sea Co. (SSC) stocks determined in London appear to have common trends and common cycles with prices of these same stocks determined in Amsterdam on the same day. Moreover, individual shocks to these assets are shown to translate quickly and accurately between the distant markets. We find little evidence that …