Wars, Inflation and Stock Market Returns in France, 1870-1945

Abstract

This paper undertakes a comparative study of the effects of three wars upon the French stock market. Periods of war are highly turbulent financial times and trigger multiple factors to act upon stock prices. The paper presents evidence suggesting that stock price behaviour is influenced by the specific way each war is financed. Financed solely by regular long-term debt, the Franco-Prussian war exhibited stock prices that only reflected real activity. On the other hand, both World Wars were partially financed by monetary creation but differed to the extent of financial repression. In the case of World War II, monetary creation within a closed repressed economy led to a paradoxical, short-lived increase in stock prices. The paper also examines how war affected the characteristics of the market. The Franco-Prussian war caused a durable high interest rate; World War I smoothed out most of the public services firms and increased volatility; whilst World War II affected the components of the stock market. Overall, due to market values being destroyed due to the World Wars, the importance of the stock market in the economy decreased.

Keywords: Paris Stock exchange, war, rare event, inflation, stock return, long term performances, 19th century, 20th century

JEL Classification: G1, G12, G33, N23, N24