When 'No News' is Bad News : Complexity and Uncertainty in the Global Crisis of 1914

I use the global crisis of 1914 as a window onto the phenomenon of investor reaction to complex news — such as sudden political upheaval. Based on a novel database of all stocks traded on the NYSE during 1914, along with “real-time” news accounts from major newspapers, I show that NYSE investors ignored the assassination of the Austrian heir and hardly reacted to the Austrian Ultimatum, which in retrospect insured the imminent start of a protracted, pan-European war. Signs of uncertainty — spikes in volatility and illiquidity, as well as trading volume — appeared in the NYSE only after Austria invaded Serbia and stock exchanges began to shut down around the world. I attribute the lagging reaction to the complexity of the political situation and inability of investors to foresee (or to believe) the broader breakdown of international relations and the inevitable impact on world financial markets.I also examine the ability of market interventions to mitigate the impact of disasters and related uncertainty shocks. The analysis demonstrates that, following a four-and-a-half-month closure, the NYSE returned to near normal levels of volatility and liquidity, suggesting that traders felt confident that the US would remain neutral. Trading volumes increased after the closure, due to renewed confidence in the liquidity of US financial markets and banks — a finding supported as well by falling rates in the overnight call money market. Notably, US stocks with the most international activity showed essentially no greater response to the political upheaval than those without