Markets under Siege: How Political Beliefs Move Financial Markets

Abstract

Can political beliefs, particularly about benefits of war versus peace, move thick financial markets? We document that following an unlikely victory by French citizen-soldiers during the German Siege of Paris (1870), prices of the highly liquid French sovereign bond diverged substantially and persistently there versus elsewhere. While France resisted, Parisian prices were higher and responded more to war events. However after the ceasefire, price differences reversed dramatically until peace terms were revealed. Difficult to reconcile otherwise, these patterns match the predictions of a simple model with different political beliefs in Paris and elsewhere about the benefits of war versus peace.