Markets under Siege: How Differences in Political Beliefs can Move Financial Markets

72 Pages Posted: 25 Feb 2022 Last revised: 21 Oct 2022

See all articles by Saumitra Jha

Saumitra Jha

Stanford Graduate School of Business

Peter Koudijs

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Marcos Salgado

Stanford Graduate School of Business

Date Written: October 20, 2022

Abstract

Can differences in beliefs about politics, particularly the benefits of war and peace, move thick financial markets? During the Siege of Paris by the Prussian army (1870-71) and its aftermath, we document that the price of the French 3% sovereign bond (rente) differed persistently between the Bourse in Paris and elsewhere, despite being one of the most widely held and actively traded financial assets in continental Europe. Further, these differences were large, equivalent to almost 1% of French GDP in overall value. We show these differences manifested themselves during the period of limited arbitrage induced by the Siege and persisted until the terms of peace were revealed.

As long as French military resistance continued, the rente price was higher in Paris than the outside markets. However, when the parties ceased fire and started negotiating peace terms this pattern was reversed. Further, while the price responded more negatively (positively) to defeats (victories) in Paris, the price responded more to peace events elsewhere.

These specific patterns are difficult to reconcile with other potential mechanisms, including differential information sets, need for liquidity, or relative market thickness. Instead, we argue, these results are consistent with prices reflecting the updating of different prevailing political beliefs that existed in Paris and elsewhere about the benefits of war versus peace.

Keywords: sovereign debt, market microstructure, conflict, pigeons, balloons

JEL Classification: N23, G12, F51

Suggested Citation

Jha, Saumitra and Koudijs, Peter and Salgado, Marcos, Markets under Siege: How Differences in Political Beliefs can Move Financial Markets (October 20, 2022). Stanford University Graduate School of Business Research Paper No. 4015, Available at SSRN: https://ssrn.com/abstract=3982707 or http://dx.doi.org/10.2139/ssrn.3982707

Saumitra Jha (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Peter Koudijs

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Marcos Salgado

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, 94305
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
161
Abstract Views
792
Rank
335,109
PlumX Metrics