David Le Bris

A challenge to triumphant optimists? A blue chips index for the Paris Stock-Exchange (1854-2007)

We have reconstructed a new blue chips (large caps) stock index for France from 1854 to 1998, based on a modern methodology. Our index differs profoundly from earlier indices, and is more consistent with French financial and economic history. We suggest this result casts some doubt on many historical stock indices, such as those used in Dimson, Marsh and Stauntons Triumph of the Optimists. Investment in French stocks provided a positive real return during the nineteenth century, but a negative one - because of inflation and wars - in the twentieth. Despite this secular negative real performance, stocks proved the best financial asset in the very long run, although with an equity premium lower than in the US.

Wars, Inflation and Stock Market Returns in France, 1870-1945

This paper 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 paper 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 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 paper 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, due to market values being destroyed due to the World Wars, the importance of the stock market in the economy decreased.It is interesting to identify the extreme cases of changes in the stock exchange caused by wars. Stock return depends on how the war is financed. The Franco-Prussian war was financed only by regular debt thus stocks reflected only situations of real activity. WWI was partially financed by short term debt; however, since capital markets kept their freedom, stock prices can be adjusted. WWII and the German occupation was also financed by short term debt from the Banque but in a closed market: stocks prices increased. War affects not only return but structural characteristics of the market too. The Franco-Prussian war caused a durable all high interest rate, WWI changed the amplitude of stock movements and WWII affected the components of markets. After WWI and WWII, the importance of stock markets in the economy decreased. WWI is the major event affecting markets during the twentieth century; a contrefactual hypothesis of a quick German victory can help to understand the real price of victory.

Testing Legal Origins Theory within France: Customary Laws versus Roman Code

Before 1804, France was strictly divided in terms of legal regimes: a part was under Roman civil law while the majority of the territory was under customary laws which, as with common law, gave more flexibility to judges and fewer rights to the state. This dichotomy offers the unique opportunity to test legal origins theory free from cross-country heterogeneity. Fiscal and census data from 1801-1821 show the absence of any negative impact of the civil law either on the whole of France or when focusing on counties bordering the legal frontier. The same is true for the population density observed in 1793 at the parish level in Auvergne, a province in which the two regimes were entangled. Civil law even appears to have a positive effect in many specifications.Law and finance theory emphasizes the negative consequences of civil law on financial and, subsequently, economic development. Before the Revolution, French territory was strictly divided according to the legal regime. Since the Middle-Ages, the southern part of France was under Justinian civil law and the north was under customary laws which, as with common law, gave more flexibility to judges and less right to the state. This dichotomy offers the unique opportunity to test the law and finance theory free from cross-country bias. Using fiscal revenues across 79 Departments from 1817-1821, we test if Departments under civil law, over the centuries and up to 15 years ago, exhibit lower financial and economic outcomes. We find that civil law Departments do exhibit lower economic performances but this difference is not robust when controlled for fundamental factors. The civil law appears even to have a positive effect in many specifications. Old Regime France does not confirm the law and finance theory.

Family Characteristics and Economic Development

This paper links economic development to age-old family characteristics through the propensity to invest and thus increase human productivity. Inequality among siblings favors investment in physical capital, while a high status of women and strong parental authority favor investment in human capital. To test this theory, a family score is built according to the presence of these three characteristics in the traditional family type of each country. This family score as well as basic family characteristics are significantly associated with better economic outcomes (GDP per capita as well as proxies for investment in human and physical capital). These relationships are robust to other factors already identified as playing a role, such as geography, ethnic fractionalization, genetic diversity, religion, and formal institutions. Reverse causality is rejected by both historical anthropology and an instrumental investigation.

Testing Asset Pricing Theory on Six Hundred Years of Stock Returns: Prices and Dividends for the Bazacle Company from 1372 to 1946

We use the Bazacle company of Toulouses unique historical experience as a laboratory to test asset pricing theory. The Bazacle company is the earliest documented shareholding corporation. Founded in 1372 and nationalized in 1946, it was a grain milling firm for most of its 600 year history. We collect share prices and dividends over its entire lifespan. The average dividend yield in real terms was slightly in excess of is 5% per annum, while the long-term price growth was near zero. The companys unique full-payout dividend policy allows us to estimate an asset pricing model with fundamentally persistent dividends and a time-varying risk correction. The model is not rejected by the data. Variations in expected future dividends are found to explain between one-sixth and one-third of variations in prices. Moreover, the risk correction is correlated with macroeconomic shocks, in particular with the volatility of grain prices.

The Stock-Bond Comovements in the Paris Bourse: Historical Evidence

Using some recently developed Paris Bourse 19th century price indexes; we study the stock-bond monthly return comovement for a 76 years long period. The comovements of stocks not only with government bonds, like majority of studies on this subject, but also with corporate bonds have been considered in this paper. A multivariate Dynamic conditional correlation GARCH(DCC GARCH) model has been implemented to assess the stock-bond return time varying correlation. The model succeeds to capture well enough the behavior of stocks and bonds returns. We do obtain variable but always highly positive conditional stock-bond correlations. The Granger causality tests which we have conducted per sub periods shows as we approach to the end of the 19th century the corporate bond market becomes more and more dominant in term of price adjustment and therefore more efficient.

The Great Divergence: French Equity Premium is Lower and Riskier than the US Since WWI

In this paper, we compare the US and French risk premium computed on high quality data. We confirm that the US risk premium has been constantly higher. We also show that the US equity outperformance is even higher when we compute the price of risk. Indeed, the US equity risk has been lower than the French one since 1917. The two world wars do not seem to explain the risk premium difference, as the US continues to outperform the French equity market after 1950. We conclude that the particular case of the outperformance of the US equity cannot be directly extrapolated to other equity markets.

What is a market crash?: WHAT IS A MARKET CRASH?

Crashes, measured as strong price decreases, are sometimes difficult to reconcile with historical events. This can be explained by the fact that a price variation will have a greater negative impact in a stable financial context than a similar variation during a highly volatile period. For example, French stocks decreased painlessly by 16 per cent in August 2002, whereas a similar fall in January 1882 led to the failure of several brokers. Market volatility was very low at the end of the nineteenth century, whereas investors are now used to dealing with large price movements. A fall of 16 per cent was much more of a shock in 1882 than it would be today. To control for the instability of the volatility, a new method for identifying crashes is proposed. Each price variation is measured in numbers of standard deviations of the preceding period. These adjusted variations can then be ranked to identify the worst market crashes. This method is tested on four long‐term series. A better match between crashes and historical events is achieved than with pure price variations. This improved matching brings new insights to several historical debates.

Testing the Tax-Loss Selling Explanation of the January Effect: Evidence from a 'Confiscatory' Tax Implemented in France in 1921

For almost a century, we document a significant January effect on the French equity market. We find strong evidences in favor of the tax-loss selling explanation for this phenomenon. Indeed, the January effect was insignificant before the introduction of a “confiscatory tax” on capital gains in 1921, and became strongly significant afterward. Moreover, the rate of taxation is statistically significant to explain the strength of the January effect over time. Studying individual stock returns, a DiffInDiff investigation shows that past losers, outperform past winners at the turn of the year but only after 1921, which reinforces further the tax-loss selling explanation of the January effect.

Our Current 'Secular Stagnation' as Expected by Jean Fourastié, 1949

Jean Fourastie introduced a meaningful but neglected theory of economic development in a 1949 book. According to Fourastie, technical progress is stronger in some industries (e.g. light bulb production) than in others (e.g. hairdressing). Meanwhile, consumers’ demand is only insatiable for products weakly affected by technological improvements. When demand for one product is saturated, additional technological progress leads to a decline in the number of workers in this sector. Therefore, workers have to migrate from activities with high productivity gains to production lines which still enjoy growing demand from consumers but which are less sensitive to technology. Gradually, jobs with low productivity gains dominate, reducing the global potential productivity gains. The tertiary civilization Fourastie expected after 2000 is associated with stagnation, despite continuous technical progress. 1800-2000 was a transitory period of global high productivity gains between two eras of stability. This stability occurs because most of the population work in activities with low productivity gains (agriculture before 1800 and the service industry after 2000). His model precedes and inspired Baumol’s analysis and provides a rationale in the “secular stagnation” debate.