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Taking stock: lessons from financial market history

  • 02 February 2017

Eighteenth century mortgages for Dutch plantation owners and market bubbles linked to Medieval German mining shares can provide important lessons for modern investors, according to a new book co-edited by Caius Bye-Fellow Elroy Dimson.

The book, Financial Market History: Reflections on the Past for Investors Today, chronicles the historical development of asset returns, stock exchanges, financial bubbles and innovation, and shines a light on the surprising connections between past and present.

Published by CFA Institute Research Foundation in conjunction with Cambridge Judge Business School, the book is edited by Prof Dimson and David Chambers, both of the school's Newton Centre for Endowment Asset Management. Prof Dimson, Chairman of the Centre, was appointed a member of Caius' Investment Committee last November.

The publication reflects what the authors note is a resurgence in interest in economic and financial history since the 2008 financial crisis. It stems from a symposium held at Cambridge Judge that brought together many of the world’s leading academics in financial market history and 30 senior investment professionals, to discuss: “What do practitioners need to know about financial market history?” 

The workshop highlighted the fact that far more data is now available chronicling the performance of a broader range of assets and national economies. However, argues Prof Dimson, “practitioners need to resist the temptation simply to download any historic time-series when modelling risk and return, without thinking about the quality of the data and the care with which the series has been compiled”. 

The first of four sections in the book, “Risk and Return over the Long Run”, examines the long-term returns of stocks, bonds and other assets for 23 countries over the 116 years since 1900, as well as how those returns have varied over time.

The second section, “Stock Markets”, includes historical overviews of the role of stock exchanges, market liquidity and initial public offerings, and finds that while the technology of trading has changed dramatically since the emergence of global financial markets in 1871, the essential conflicts between bankers and investment management firms on the one hand and stock traders on the other persist.

“Bubbles and Crises”, the third section, provides investors with a survey of the major bubble episodes, emphasises the particular role played by irrational exuberance, and highlights the most important lessons for investors to consider when the next bubble comes around - though it points out that financial bubbles are extremely rare events. It's equally important to study the factors that prevented the crises that never materialised, the book wisely counsels, as much as those that led to the crises that we actually observe.

The fourth and final section, “Financial Innovation”, discusses important historical episodes illustrating how innovation has been fundamental in driving forward the development of financial markets. Such examples from 18th-century Dutch financial history include structured finance in the form of the securitisation of mortgage loans to West Indies plantation owners as well as the first mutual funds.

There are also fascinating accounts of the emergence of specialist venture capital investors in the United States in the mid-20th century, and of the development of institutional investment in the UK and the US over the last century and a half.

The Research Foundation of the CFA Institute, which offers the Chartered Financial Analyst certification, has also recorded a series of interviews with contributors to the book, which will be made available on their website.

Financial Market History: Reflections on the Past for Investors Today By David Chambers and Elroy Dimson
Publisher: CFA Institute Research Foundation
ISBN-10: 1944960139. ISBN-13: 978-1944960131

Available from Amazon UK price £31.94, Amazon US price $38.95. The book can also be read online here.

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