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Wars, inflation and stock market returns in France, 1870–19451

Published online by Cambridge University Press:  27 September 2012

David Le Bris
David Le Bris*
Affiliation:
BEM Bordeaux Management School, david.lebris@bem.edu
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Abstract

This article 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 article 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 with regard 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 article 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, mainly due to market values being destroyed during the world wars, the importance of the stock market in the economy decreased.

Keywords

stock returnwargreat reversalrare eventfinancial repression

JEL classification

N24: Europe: 1913– G12: Asset Pricing • Trading Volume • Bond Interest Rates G1: General Financial Markets N23: Europe: Pre-1913
Type
Articles
Information
Financial History Review , Volume 19 , Issue 3 , December 2012 , pp. 337 - 361
Copyright
Copyright © European Association for Banking and Financial History e.V. 2012

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Footnotes

1

Many thanks to two anonymous referees, Sean Hladkyj, Kim Phan, Patrice Baubeau, Kim Oosterlinck, Dominique Barjot, Hervé Joly, Michel Margairaz, Eugene White, Jean-Jacques Rosa, Christian Rietsch, Maxime Merli, Claude Diebold, Anders Ogren, Pierre-Cyrille Hautcoeur, Laure Quennouëlle-Corre, Olivier Dard and all participants of the conference ‘Monetary and Financial Structures: The Impact of Political Unrests and Wars’, Paris, June 2008, the ‘Future Research in Economic History (FRESH) meeting’, Strasbourg, November 2008 and the GDR ‘Les entreprises, l'Occupation et le Second Vingtième siècle’, Metz, October 2009.

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