Volatility in an era of reduced uncertainty: Lessons from Pax Britannica

Abstract

Although it has been well established that financial volatility is related to news and macroeconomic shocks, there has been less emphasis on the importance of underlying economic and political stability. In this paper we study the behavior of consol returns since 1729 and identify a greater-than-50% decline in volatility from the end of the Napoleonic wars in 1815 until the First World War. News events and macroeconomic variables cannot account for this extended period of reduced volatility. Underlying political stability under Pax Britannica seems to be a more likely explanation, however.

How Fiscal Policy Affects Prices: Britain's First Experience with Paper Money

“…A more formal analysis of the returns on British consols was conducted by William Brown, Richard C. Burdekin, and Marc D. Weidenmier (2005) and revealed that the same types of event affected bond yields and the agio . For overlapping periods (1810–1823), shifts identified in the bond yield series were either identical to the break dates detected here (Napoleon returned from Elba in March 1815) or related to connected events (bond yields decreased by the end of March 1814 when Paris surrendered; the agio decreased in June 1814 when the Treaty of Paris ended the Napoleonic Wars).…”

Novel market inefficiencies from early Victorian times

“…This section reviews basic facts about gilts (British government bonds) in the nineteenth century. Modern authors who have looked at long-term interest rates in Britain have studied Consols (CA) to the almost complete exclusion of other gilts (see Brown et al 2006; Capie and Webber 1985; Gayer et al 1953; Heim and Mirowski 1987; Homer and Sylla 1996; Klovland 1994; Mitchell 1988; Siegel 1992). All published studies have found that the nineteenth-century gilts markets passed those standard efficiency tests that were applied (Brown and Easton 1989; Brown et al 2006; Mitchell et al 2002).…”

Death and the stock market: international evidence from the Spanish Flu

“…This monthly series is expressed in per cent per annum and, like the stock market series, is drawn from Global Financial Data. Meanwhile, monthly money supply data were not always available -withJeng, Butler, and Liu (1990) in any event finding no evidence of causal effects of money supply on stock prices over the 1921-1930 period except in the case of the United Kingdom (which was excluded from the present study due to deaths being available only on a quarterly basis).6 Brown, Burdekin, and Weidenmier (2006) find that, while there is some instability associated with the onset of World War I, major increases in consol volatility are note seen until Britain's exit from the gold standard in 1931 effectively put an end to debt obligations being fixed in real terms.…”