Final Report Summary - INSECUREASSETS (SECURITIES IN TIMES OF INSECURITY: ASSET RETURNS AND HOLDINGS DURING POLITICAL, SOCIAL AND ECONOMIC CRISES IN EUROPE, 1900-1950)
The project examined the impact of political and social turmoil is on asset prices and investment returns. As part of the research, we broadened the scope, including work on the causes of instability as well.
Determinants of asset returns in times of crisis. One core question for the project was the extent to which different assets provide a hedge against negative shocks in times of political and social turmoil. The answer appears to be – much less than one might wish. Russian business and nobles not only lost all their investments in stocks, bonds, and land; their human capital was also nearly worthless once they left Russia, as the string failed enterprises and banks set up all over Europe after 1919 amply documents. Similar results emerge from the analysis of Spanish tax returns; as the Spanish civil war breaks out and moves across the country, both incomes and asset values are severely hit at the same time. Finally, the results for German Jews point in the same direction -- at the same time as assets were gradually confiscated on an increasing scale, labor income declined (first for the regulated professions, than for all other occupations). These results matter because the equity premium we should expect in the consumption CAPM is a direct result of a. the riskiness of the asset b. co-movements in returns with other sources of income. Put another way, returns on stocks (and land, and bonds) look too good in normal times. If there are lessons from Europe’s age of turmoil, then it is clear almost every asset except (portable) savings vehicles like gold or jewellery is a poor store of value against that proverbial “rainy day” – meaning that the risk of asset values, (legal) access to the asset, and liquidity being available when most needed are low.
Causes of instability. Research here has especially examined the effects of policy (such as budget cuts) on instability (ranging from demonstrations and strikes to assassinations and attempted overthrows of the government), and the deep-rooted, cultural determinants of ethnic hatred (using data from Germany). A key finding of me and Jacopo Ponticelli (GSB Chicago) is that on average, austerity measures are highly correlated with measures of unrest – the more severe budgets are, the higher the frequency of “unrest events”. Modelling and predicting unrest is difficult at the best of times since they tend to be rare and infrequent events. However, if one goes back to data from the last century, it is abundantly clear that fiscal policy is one of the key drivers of instability and unrest.
Most theories of ethnic hatred require the minority in question to be present. At the same time, we know that attitudes persist over the long term, typically as a result of parent-child transmission. The question is whether there can be a perpetuation of cultural beliefs even in the absence of the persecuted minority. Combining data from medieval Germany with measures of persecution in the interwar period, Nico Voigtländer (UCLA) and I show that the same places that attacked their Jews in 1350 were still much more anti-Semitic in the 1920s and 1930s. We show that persistence is also systematically lower where i. inflows of migrants changed population composition ii. Economic motives made it less attractive to hold negative beliefs.
Determinants of asset returns in times of crisis. One core question for the project was the extent to which different assets provide a hedge against negative shocks in times of political and social turmoil. The answer appears to be – much less than one might wish. Russian business and nobles not only lost all their investments in stocks, bonds, and land; their human capital was also nearly worthless once they left Russia, as the string failed enterprises and banks set up all over Europe after 1919 amply documents. Similar results emerge from the analysis of Spanish tax returns; as the Spanish civil war breaks out and moves across the country, both incomes and asset values are severely hit at the same time. Finally, the results for German Jews point in the same direction -- at the same time as assets were gradually confiscated on an increasing scale, labor income declined (first for the regulated professions, than for all other occupations). These results matter because the equity premium we should expect in the consumption CAPM is a direct result of a. the riskiness of the asset b. co-movements in returns with other sources of income. Put another way, returns on stocks (and land, and bonds) look too good in normal times. If there are lessons from Europe’s age of turmoil, then it is clear almost every asset except (portable) savings vehicles like gold or jewellery is a poor store of value against that proverbial “rainy day” – meaning that the risk of asset values, (legal) access to the asset, and liquidity being available when most needed are low.
Causes of instability. Research here has especially examined the effects of policy (such as budget cuts) on instability (ranging from demonstrations and strikes to assassinations and attempted overthrows of the government), and the deep-rooted, cultural determinants of ethnic hatred (using data from Germany). A key finding of me and Jacopo Ponticelli (GSB Chicago) is that on average, austerity measures are highly correlated with measures of unrest – the more severe budgets are, the higher the frequency of “unrest events”. Modelling and predicting unrest is difficult at the best of times since they tend to be rare and infrequent events. However, if one goes back to data from the last century, it is abundantly clear that fiscal policy is one of the key drivers of instability and unrest.
Most theories of ethnic hatred require the minority in question to be present. At the same time, we know that attitudes persist over the long term, typically as a result of parent-child transmission. The question is whether there can be a perpetuation of cultural beliefs even in the absence of the persecuted minority. Combining data from medieval Germany with measures of persecution in the interwar period, Nico Voigtländer (UCLA) and I show that the same places that attacked their Jews in 1350 were still much more anti-Semitic in the 1920s and 1930s. We show that persistence is also systematically lower where i. inflows of migrants changed population composition ii. Economic motives made it less attractive to hold negative beliefs.