A reflection of history: fluctuations in Greek sovereign risk between 1914 and 1929

Abstract

Time series of daily data for Greek sovereign risk have been compiled and analysed statistically to shed light on the way that historical events, including political and institutional changes, determined the creditworthiness of the Greek government on the London stock market from the start of the Great War until the Great Crash. No a priori important dates were specified. The Asia Minor campaign and its aftermath exerted a strongly negative impact on the value of Greek sovereign debt and as a result the risk premium increased rapidly. Statistical analysis shows that investors acted upon news of fiscal performance and public debt developments. Unforeseen political changes also influenced market participants' expectations. In contrast, institutional innovations such as the adoption of the gold exchange standard and the establishment of a central bank de novo did not result in any quantitative market response. However, stabilization and the concomitant institutional reforms were gradually factored into the market price of Greek sovereign debt traded in London and as a result the creditworthiness of the Greek government steadily improved.