Title: Markets under Siege: How Political Beliefs Move Financial Markets
Speaker: Marcos Salgado
Abstract: Can beliefs about politics, particularly the benefits of war and peace, move thick financial markets? We show that during the Siege of Paris (1870-71) by the Prussian army the prices of the French 3% sovereign bond (rente) differed persistently in Paris versus elsewhere, despite being the most actively traded financial asset in continental Europe. Further, these differences were large, equivalent to almost 1% of French GDP in overall value. These differences manifested themselves during the period of limited arbitrage induced by the Siege and persisted until the peace terms were revealed. As long as French military resistance continued, the rente price in Paris responded more to war events, while also remaining persistently higher. However, when the parties ceased fire, the price differences were dramatically reversed. We provide evidence that is difficult to reconcile with other potential mechanisms, including differential information sets, discount rates, need for liquidity, or relative market thickness. Instead, we show the patterns are consistent with a simple theoretical framework where prices reflect the updating of different prevailing political beliefs in Paris and elsewhere about the benefits of war versus peace.
