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What Moved Share Prices in the Nineteenth-Century London Stock Market?

Journal: Economic History Review

Date: 20180201

Author: Campbell, Gareth; Quinn, William; Turner, John D.; Ye, Qing

Abstract:
Using a new weekly blue-chip index, this article investigates the causes of stock price movements on the London market between 1823 and 1870. We find that economic fundamentals explain about 15 per cent of weekly and 34 per cent of monthly variation in share prices. Contemporary press reporting from the London Stock Exchange is used to ascertain what market participants thought was causing the largest movements on the market. The vast majority of large movements were attributed by the press to geopolitical, monetary, railway-sector, and financial-crisis news. Investigating the stock price changes on an independent list of events reaffirms these findings, suggesting that the most important specific events that moved markets were wars involving European powers.

Link: Google Scholar

Background and Context

Time Period & Market

The study examines the London Stock Exchange from 1823-1870, during its formative period when it became the world's leading stock market.

Market Growth

During this period, equity securities doubled in number and market value grew from less than 10% to 27% of GDP, financing railways and other transformative companies.

Methodology

The researchers constructed a weekly blue-chip index of the 30 largest companies and analyzed contemporary press reports to identify what caused major market movements.

Economic Fundamentals Explain Increasing Share of Market Movements After 1844

  • Shows how much of market movements could be explained by economic factors
  • Post-1844 period saw greater impact of economic fundamentals
  • Monthly data shows stronger relationship than weekly data

Geopolitical Events Dominated Large Market Movements

  • Shows breakdown of what caused substantial market movements
  • Political events accounted for about 50% of major movements
  • Financial crises and monetary policy changes were other key factors

European Wars Had Greatest Impact on Stock Returns

  • Compares stock returns during different types of conflicts
  • European wars consistently led to negative returns
  • Colonial and American wars had minimal impact

Financial Crises Led to Consistent Market Declines

  • Shows market returns during major financial crises
  • All crises resulted in substantial negative returns
  • 1847 and 1866 crises had particularly severe impacts

Bank Rate Changes Had Variable Market Impact

  • Illustrates market response to Bank Rate changes
  • Rate increases generally led to market declines
  • Impact varied based on whether changes were anticipated

Contribution and Implications

  • First comprehensive study of what moved the early UK equity market during its formative period
  • Demonstrates that Victorian-era markets were less volatile than modern markets and movements were more easily explained
  • Shows the crucial importance of European geopolitical events in determining market movements

Data Sources

  • Fundamentals Chart: Based on Table 5 showing R-squared values from regression analysis
  • Event Types Chart: Based on Table 9 showing substantial movement explanations by category
  • War Impact Chart: Based on Table 10 showing returns during different types of conflicts
  • Crisis Chart: Based on Table 12 showing financial crisis returns
  • Bank Rate Chart: Based on Table 11 showing returns around Bank Rate changes