Markets work in war: World War II reflected in the Zurich and Stockholm bond markets

Financial History Review

Volumn 11, Issue 1, 2004, Pages 51-67

  Frey, Bruno S ^a,b   Waldenström, Daniel ^a,c  

^a UNIVERSITY OF ZURICH   (Switzerland)

^b Inst Empirische Wirtshaftsforschung   (Switzerland)

^c STOCKHOLM SCHOOL OF ECONOMICS   (Sweden)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 3042527350     PISSN: 09685650     EISSN: None     Source Type: Journal    
DOI: 10.1017/S0968565004000046     Document Type: Review

References (27)

1. We wish to thank Magnus Henrekson for his helpful comments.
2. K. L Willard, T. W. Guinnane and H. S. Rosen, 'Turning points in the civil war: views from the Greenback market', American Economic Review, 86 (1996).
3. B. S. Frey and M. Kucher, 'History as reflected in capital markets: the case of World War II', Journal of Economic History, 60 (2000); B. S. Frey and M. Kucher, 'World War II as reflected on capital markets', Economics Letters, 69 (2000); B. S. Frey and M. Kucher, 'Wars and markets: how bond values reflect the Second World War', Economica, 68 (2001) and D. Waldenström and B. S. Frey, 'How government bond prices reflect wartime events; the case of the Stockholm market', Working Paper Series in Economics and Finance No. 489, Stockholm School of Economics (2002).
4. B. S. Frey and M. Kucher, 'History as reflected in capital markets: the case of World War II', Journal of Economic History, 60 (2000); B. S. Frey and M. Kucher, 'World War II as reflected on capital markets', Economics Letters, 69 (2000); B. S. Frey and M. Kucher, 'Wars and markets: how bond values reflect the Second World War', Economica, 68 (2001) and D. Waldenström and B. S. Frey, 'How government bond prices reflect wartime events; the case of the Stockholm market', Working Paper Series in Economics and Finance No. 489, Stockholm School of Economics (2002).
5. B. S. Frey and M. Kucher, 'History as reflected in capital markets: the case of World War II', Journal of Economic History, 60 (2000); B. S. Frey and M. Kucher, 'World War II as reflected on capital markets', Economics Letters, 69 (2000); B. S. Frey and M. Kucher, 'Wars and markets: how bond values reflect the Second World War', Economica, 68 (2001) and D. Waldenström and B. S. Frey, 'How government bond prices reflect wartime events; the case of the Stockholm market', Working Paper Series in Economics and Finance No. 489, Stockholm School of Economics (2002).
6. B. S. Frey and M. Kucher, 'History as reflected in capital markets: the case of World War II', Journal of Economic History, 60 (2000); B. S. Frey and M. Kucher, 'World War II as reflected on capital markets', Economics Letters, 69 (2000); B. S. Frey and M. Kucher, 'Wars and markets: how bond values reflect the Second World War', Economica, 68 (2001) and D. Waldenström and B. S. Frey, 'How government bond prices reflect wartime events; the case of the Stockholm market', Working Paper Series in Economics and Finance No. 489, Stockholm School of Economics (2002).
7. K. Oosterlinck, 'The bond market and the legitimacy of Vichy France', Explorations in Economic History, 40 (2003).
8. P. Mauro, N. Sussman and Y. Yafeh, 'Emerging market spreads: then versus now', Quarterly Journal of Economics, 117 (2002).
9. With the exception of May and June 1940, when the Zurich stock exchange was closed.
10. In recent years, the efficiency of capital markets has been under debate. Some scholars have argued that noise traders pursue irrational speculations which influence the market (see e.g. B. De Long, A. Shleifer, L. H. Summers and R. J. Waldman, 'Noise trader risk in financial markets', Journal of Political Economy, 98, 1990). However, bond prices differ from stock prices in that their underlying (fundamental) price is more easily defined, which makes bonds less subject to these inefficiency problems.
11. See the literature on the marginal trader and the Hayek Hypothesis (commonly understood as the proposition that competitive markets conform to basic efficiency postulates), e.g. V. L. Smith, 'Markets as economizers of information: experimental examination of the "Hayek Hypothesis'", Economic Inquiry, 20 (1982) or R. Forsythe, F. Nelson, G. R. Neumann and J. Wright, 'Anatomy of an experimental stock market', American Economic Review, 82 (1992).
12. See the literature on the marginal trader and the Hayek Hypothesis (commonly understood as the proposition that competitive markets conform to basic efficiency postulates), e.g. V. L. Smith, 'Markets as economizers of information: experimental examination of the "Hayek Hypothesis'", Economic Inquiry, 20 (1982) or R. Forsythe, F. Nelson, G. R. Neumann and J. Wright, 'Anatomy of an experimental stock market', American Economic Review, 82 (1992).
13. W. De Bondt and R. Thaler, 'Does the stock market overreact?', Journal of Finance, 40 (1985).
14. See e.g. H. Kozicki (ed.), Developments in Modern Historiography (Basingstoke, 1993).
15. See e.g. K. Oosterlinck, 'Les anticipations des marchés obligataires belges de 1939 à 1944', Cahiers d'histoire du temps present, 6 (2000), for the case of Belgium.
16. See e.g. K. D. Bracher, Die Auflösung der Weimarer Republik. Eine Studie zum Problem des Machtverfalls in der Demokratie (Villingen, 1964).
17. See Waldenström and Frey, 'Government bond prices', for further details about the price indexes.
18. For a recent review of this literature, see B. E. Hansen, 'The new econometrics of structural change: dating breaks in U.S. labor productivity', Journal of Economic Perspectives, 15 (2001).
19. Willard et al., 'Turning points', who only present an applied version of the sequential test of A. Banerjee, R. L. Lumsdaine and J. H. Stock, 'Recursive sequential tests of the unit root and trend break hypotheses: theory and international evidence", Journal of Business and Economic Statistics, 10 (1992).
20. In the Zurich market index, Swiss, German and French government bonds dominate whereas the Stockholm market index is dominated by Swedish and to some extent German bonds.
21. Equation (1) contains no deterministic time trend because of the short time periods of the windows we have used.
22. l, l > k below 1.6. The same procedure was used by Willard et al., 'Turning points.'
23. See e.g. B. H. Liddell Hart, History of the Second World War (New York, 1970).
24. See e.g. G. L. Weinberg, The World at Arms: a Global History of World War II (Cambridge, 1994).
25. It is not surprising that the size of the reactions differ. It should be remembered that the reactions identified are conditional on the behaviour of all other government bonds traded in the two stock exchanges. Just as the comparison differs, so does the size of the reaction.
26. Frey and Kucher, 'History as reflected in capital markets' p. 476; Waldenström and Frey 'Government bond prices', p. 12.
27. Frey and Kucher, 'History as reflected in capital markets' p. 476; Waldenström and Frey 'Government bond prices', p. 12.