I link in an earlier post to Niall Ferguson’s February 2006 paper “Political risk and the international bond market between the 1848 revolution and the outbreak of the First World War”, but it’s worth a post of its own. Published in The Economist History Review, it is a magisterial and data-rich look at how bond prices have performed before and during various periods of increasing risk, most importantly, World War I, which the bond markets mispriced for a surprisingly long time during the lead-up.
An investor whose exposure to long-term government bonds was mediated though a savings account might well have overlooked the potential damage a war could do to his net worth, or might well have missed the signs of impending conflict. Yet even to the financially sophisticated, as far as can be judged by the financial press, the First World War came as a surprise. Like an earthquake on a densely populated fault line, its victims had long known that it was a possibility, and how dire its consequences would be; but its timing remained impossible to predict, and therefore beyond the realm of normal risk assessment.