A Challenge to Triumphant Optimists? A New Index for the Paris Stock-Exchange (1854-2007)

Most empirical knowledge on the long term performance of financial investments is derived from the behaviour of the most successful markets. Recent research has tried to broaden the sample of markets studied towards European ones, many of which were among the worlds’ most developed up to World War One and again weight substantially in today’s global portfolio. The synthesis by Dimson, Marsh and Staunton (2002) proposes data on the 20th century for 16 countries, and ends up with an optimistic tone, although a less enthusiastic one than most of the American literature. They argue that even in the worst case – Belgium – the stock market long term performance remained positive (2.5% yearly real return on the 20th century), and superior to that of other investments. The results of this paper suggest that most of the continental European results may be wrong, since they may significantly overestimate the performance of investments in stocks during the 20th century and underestimate the impact of the world wars. We concentrate on the French case, but we argue that similar calculations on other European countries may well give similar results. This paper describes and analyzes a new homogeneous stock index for the French stock market from 1854 to 1998. The paper first describes the index’s methodology (a weighted, yearly adjusted index comparable to Euronext’s CAC40). It then provides some major results. First, investment in French stocks provided a positive real return during the 19th century, but a negative one – because of inflation – in the 20th. Equities still earned more than bonds or bills, but the equity premium was relatively low and, contrary to the well-known US case, consistent with standard models of risk aversion. These results contrast with those of older studies of the French market, which were based on un-weighted large indices suffering survivor bias. They are more consistent with the history of the French financial markets and economic policy regimes in the 19th and 20th centuries. They demonstrate the major impact the two world wars had on the French economy. If one excepts these wars, the real return from 1914 to 2006 is positive and in line with that of the second half of the 19th century.