Price Formation on Clandestine Markets: The Case of the Paris Gold Market during WWII

Because of data scarcity, there are almost no quantitative analyses dealing with clandestine markets, despite their prime importance during wartime. This paper exploits a unique database of daily prices of gold coins traded in occupied Paris, in order to gain insights into price formation on such a market. First, using data from Switzerland, we show that arbitrage took place, despite the costs and risks involved, and led to a gradual (but incomplete) convergence of gold prices. Second, on basis of an event study, we provide evidence that the introduction of higher penalties for black market activities had no significant impact on prices. Finally, we analyze the law of one price on this clandestine market. Under this law, one gram of gold should have a similar value, whatever form it takes (independently of the coin considered). However, we do find large price variations for one gram of gold contained in different coins. We attribute this result to market participants’ taste for specific gold coins and we present our results in the framework developed by Sargeant and Velde (2002).