Market Behavior in the Face of Political Violence: Evidence from Tsarist Russia

Christopher A Hartwell

doi:10.3390/jrfm14090445

Abstract

Even efficient financial markets may break down under periods of prolonged stress, especially when the ramification of an event is unclear. Political violence is such an event, sending immediate signals about possible impact on firm valuations but unclear information about the future viability of existing institutions. This paper examines the effect of political violence in 19th century Russia on its stock market; using a battery of unit root and variance ratio tests, the evidence is that Russian financial markets were mostly efficient in processing short-term information from political violence. However, when violence was at its peak between the assassination of the Tsar in 1881 and the 1905 revolution, large deviations from efficiency can be detected, as markets were unsure about the viability of the existing rules of the game.

Highlights

Financial markets have been shown to recognize the “black swan” nature of political violence, especially terrorism, and discount their occurrence appropriately (Mnasri and Nechi 2016)
We will focus on the entire period of maximum terrorism in Russia, namely from March 1881 to December 1907. This allows us to have 322 observations, well over half our sample of 561 months and half again as many observations as utilized by Kapetanios and Shin (2008) in their examination of exchange rates.4. Results for both the OLS and GLS de-trended unit root tests for the expanded period around the October Revolution are shown in Table 6 and the results point towards confirmation of the thesis that markets were rattled by the cumulative violence
Financial markets may be on the whole weak form efficient, but even they have their limits in the face of uncertainty, especially with the informational content of an event of political violence is unknown

Summary

Introduction

Financial markets have been shown to recognize the “black swan” nature of political violence, especially terrorism, and discount their occurrence appropriately (Mnasri and Nechi 2016). Even the most efficient markets can be stressed and in times of crises, interruptions to efficiency may occur (Anagnostidis et al 2016; Aktan et al 2019), especially in an environment where the informational content of an event is uncertain. Political violence represents such a form of stress on financial markets, as these events often do not offer precise and actionable information about the longer-term ramifications of instability. The cumulative effect of additional instability may call into question the health of the entire institutional system of a country, with withdrawal or reallocation of portfolios a rational response to perceived continued instability

Methods

Results

Conclusion