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Financial Market History: Reflections on the Past for Investors Today

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This chapter summarizes the long-run global historical evidence on the returns from stocks, bonds, bills, and exchange rates, all adjusted for inflation, over the 116 years since 1900. It updates and expands the data originally published in our 2002 book, Triumph of the Optimists. Given that returns are volatile, long-run historical data are important for understanding security returns and long time series are needed both to reduce measurement errors and to span the broadest possible range of historical market conditions.


Since the 2008 financial crisis, a resurgence of interest in economic and financial history has occurred among investment professionals. The monograph, Financial Market History, will discuss some of the lessons drawn from the past that may help practitioners when thinking about their portfolios. The monograph is edited by David Chambers and Elroy Dimson, the academic leaders of the Newton Centre for Endowment Asset Management at the University of Cambridge.

Some investment practitioners have long understood the benefit of learning from our financial past. For example, Russell Napier, in his book Anatomy of the Bear, and Andrew Smithers and Stephen Wright, in their book Valuing Wall Street, use financial history to inform and guide their investment strategies. Many other excellent publications would repay any practitioner who wishes to gain a deeper understanding of why financial markets have developed in the manner they have over the last several hundred years. These include, to name but a few, Niall Ferguson’s The Ascent of Money, William Goetzmann’s and Geert Rouwenhorst’s The Origins of Value, Raghuram Rajan’s and Luigi Zingales’s Saving Capitalism from the Capitalists, and William Goetzmann’s recently published Money Changes Everything.

Collection of the essays in Financial Market History has been supported by the CFA Institute Research Foundation, the CFA Society United Kingdom, and others. The monograph brings together a series of chapters from leading academics in historical finance. Their shared motivation is to examine a wide range of subjects that they believe are particularly relevant for investors today.

One of the major ways in which financial history contributes to investment practice is by providing long-run series of data on different asset classes. Elroy Dimson, Paul Marsh, and Mike Staunton summarize the long-run global evidence on the risk and return characteristics of such traditional asset classes as equities, bonds, bills, and exchange rates. Long-run return series span the broadest possible range of historical market conditions and are necessary for investors to understand likely future investment outcomes. Antti Ilmanen’s essay complements this analysis by examining the time-varying properties of stocks. In particular, he considers how sensible it is to make use of long-run data series to try to time entry into and exit from markets. Jan Annaert, Frans Buelens, and Angelo Riva discuss some of the pitfalls to be avoided when assembling or using historical asset price data, especially equity and bond data. The temptation to simply download historical data in modeling risk and return, without thinking about the quality of the data and the care with which return series have been compiled, is to be avoided at all costs. Olivier Accominotti discusses the returns to two common currency-trading strategies, namely, carry and momentum. The tendency is to think that modern currency trading began after the collapse of Bretton Woods in the 1970s, but the foreign exchange market first emerged in its modern-day form in 1919. It seems we were largely unaware that currencies were actively traded through most of the 1920s and 1930s. Christophe Spaenjers provides investors with a fascinating insight into other assets that can be found in portfolios of high-net-worth individuals: real estate, collectibles, and precious metals and diamonds. Much academic work has been undertaken in recent years to collect historical prices of some of these assets, and we now have a better sense of their longrun performance characteristics.

Modern stock exchanges trace their origins back to Amsterdam in the early 17th century. Larry Neal’s essay considers the origins and development of the most important stock market to emerge through the 19th century, the London Stock Exchange. How the LSE chose to organize itself had implications for the subsequent innovations in the way stocks were traded. Furthermore, some of the issues raised today by the emergence of electronic exchanges would have been familiar to the stock exchanges of more than a century ago, especially concerns about the liquidity with which stocks can be traded on the exchange. Caroline Fohlin’s chapter offers a fascinating insight into how liquidity improved on the New York Stock Exchange in the early 20th century as technology improved, and she highlights how particular trading structures influence information flows and ultimately market liquidity. Carsten Burhop and David Chambers survey the long-run historical evidence about IPOs in the world’s major stock markets. Their discussion addresses whether three phenomena— underpricing, the IPO cycle, and long-run underperformance—that are observed in modern markets existed in earlier times.

Stock markets and bubble episodes are frequently mentioned in the same breath. William Goetzmann reminds us that although bubbles insert themselves deeply into the investor psyche, they are relatively infrequent. He examines the frequency of large, sudden run-ups in stock prices since 1900 and concludes that the chances of the market giving back its gains following a doubling in value are only about 10%. In other words, based on the history of the 20th century, only a small fraction of stock market booms ever go sour and turn into bubbles. Eugene White provides investors with a survey of the major bubble episodes, emphasizes the particular role played by irrational exuberance, and highlights the most important takeaways for investors to consider when the next bubble comes around. Charles Goodhart notes that financial crises usually arise when asset bubbles financed through bank credit expansion run their course. Prior to the middle of the 20th century, it was often a combination of an equity bubble with bank credit expansion that led to such a crisis; more recently, however, the key interaction has been between real estate boom/busts and credit expansion. Goodhart goes on to discuss the range of potential cures for such crises that have been offered but concludes that the achievement of a financial-crisis-free economy will remain elusive.

Financial innovation has been an important feature of financial market development over the centuries. Geert Rouwenhorst’s essay on early financial contracts is a reminder that not all innovative security designs survive and that we can learn from those that do not as well as those that do. Tom Nicholas’s contribution focuses on a particularly successful innovation in the United States, namely, venture capital. He describes the origins and development of high-tech venture investing in the post-1945 period and the factors that led to its success. Janette Rutterford and Leslie Hannah examine one of the most significant financial innovations in modern finance, namely, the institutionalization of securities investment via the rise of insurance companies, mutual funds, and pension funds.

This monograph is not intended to be exhaustive. Much important work by other eminent scholars has been omitted because of space limitations. Furthermore, as Barry Eichengreen’s essay highlights, new frontiers in financial history are being opened up in the wake of the 2008 financial crisis. The hope of the editors is that this volume will persuade more practitioners that a detailed knowledge of the past can be worthwhile in tackling the investment challenges of the future.


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About the Author(s)

Elroy Dimson

Chairman of the Centre for Endowment Asset Management at Cambridge Judge Business School, emeritus professor of finance at London Business School, and adviser to the board of FTSE International

Paul Marsh

Emeritus professor of finance at London Business School

Mike Staunton

Director of the London Share Price Database, a research resource of London Business School