Historical Methods: A Journal of Quantitative and

Interdisciplinary History

ISSN: 0161-5440 (Print) 1940-1906 (Online) Journal homepage: http://www.tandfonline.com/loi/vhim20

The end of the Ottoman Empire as reflected in the

İstanbul bourse

Avni Önder Hanedar, Elmas Yaldız Hanedar & Erdost Torun

To cite this article: Avni Önder Hanedar, Elmas Yaldız Hanedar & Erdost Torun (2016) The end
of the Ottoman Empire as reflected in the İstanbul bourse, Historical Methods: A Journal of
Quantitative and Interdisciplinary History, 49:3, 145-156, DOI: 10.1080/01615440.2015.1118365

To link to this article: http://dx.doi.org/10.1080/01615440.2015.1118365

Published online: 17 Jun 2016.

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 HISTORICAL METHODS
2016, VOL. 49, NO. 3, 145–156
http://dx.doi.org/10.1080/01615440.2015.1118365

The end of the Ottoman Empire as reflected in the _Istanbul bourse

€
Avni Onder Hanedara,b, Elmas Yaldız Hanedarc, and Erdost Toruna
a
Faculty of Business, Dokuz Eyl€ul University; bFaculty of Political Sciences, Sakarya University; cFaculty of Economics and Administrative Sciences,
Yeditepe University

ABSTRACT KEYWORDS
The Ottoman Empire faced catastrophic events during its period of dissolution which started with First World War; Inclan-Tiao
the First World War. At the end of this war, the Ottoman lands were shared by the Allied forces. As a test; Ottoman government
reaction to this occupation, the Turkish War of Independence started in 1919 and finished in 1923. bonds; structural break;
The authors aim to examine how these events were reflected in the _Istanbul bourse, using Ottoman Turkish War of Independence
government bond prices data between 1918 and 1925. Econometric methodology of Carla Inclan
and George Tiao (1994) identifies several break points, which imply a lower risk for the repayment
of the bonds during the end of the First World War and the Turkish War of Independence.
Downloaded by [Avni Onder Hanedar] at 18:14 17 June 2016

Introduction
The increased probability of the end of a war means lower
government expenditure, budget deficits, interest rates,
and inflation (Ferguson 2006). This leads to an increase
in demand for government bonds as investors think that
the debt will be serviced, which results in a large increase
in bond prices and volatility (Elmendorf, Hirschfeld, and
Weil 1996; Waldenstr€om and Frey 2008). The empirical
literature on bond markets is mainly based on govern-
ment bonds during several wars, such as the U.S. Civil
War, and the First and Second World Wars.
William O. Brown and Richard Burdekin (2000) and
Kristen L. Willard, Timothy W. Guinnane, and Harvey
S. Rosen (1996) showed that investors were sensitive to
war news during the U.S. Civil War, as there were sub-
stantial changes in the prices of government bonds and
“greenbacks.” On the other hand, Marc D. Weidenmier
(2002) found that not all war-related news during the
U.S. Civil War can be related to price fluctuations.
Daniel Waldenstr€om and Bruno S. Frey (2008) indi-
cated that there was a positive relationship between wars
and the yields of bonds in the Nordic countries during
the Second World War (WWII), as governments had dif-
ficulty paying their debts because of the increasing expen-
diture required during wartime. Kim Oosterlinck (2003)
focused on the effects of military and political events on
daily bond prices on the Paris Stock Exchange from 1942
to 1944 and found that investors were sensitive to unan-
ticipated political events. Brown and Burdekin (2002)
indicated that the prices of German bonds were affected
by important political events, such as the outbreak of
WWII. Similarly, Frey and Marcel Kucher (2000, 2001)
found that several war-related events led to statistically
significant changes from 1928 to 1948 in the prices of
bonds issued by five European countries.
Although there is no research into the effects of the
First World War (WWI) on the Ottoman bond market,
several studies examine the effects of WWI-related events
on government bonds. Contrary to the traditional view
among historians, using data of yields for bonds in the
United Kingdom, Italy, Germany, Austria-Hungary, and
Russia traded on the London Stock Exchange, Niall
Ferguson (2006) did not demonstrate an increase in war
risk during the political crises of 1880–1914, which her-
alded the outbreak of WWI. On the other hand, Paolo
Mauro, Nathan Sussman, and Yishay Yafeh (2006)
showed the intensity of war threats perceived by investors
of emerging countries’ bonds traded on the London Stock
Exchange, due to wars and violence between 1870 and
€
1913. Similarly, Avni Onder Hanedar, Erdost Torun, and
Elmas Yaldız Hanedar (2015) indicated higher volatility
in the prices of Ottoman government bonds traded on
_
the Istanbul bourse, due to wars from 1910 to the out-
break of WWI. Douglas W. Elmendorf, Mary L. Hirsch-
feld and David N. Weil (1996) found that the war-related
news of WWI had significant effects on the volatility of
British government bond returns. Recently, David S.
Adams (2015) indicated a statistically significant

CONTACT Avni Onder € Hanedar onderhanedar@gmail.com Faculty of Business, Dokuz Eyl€ul University, Kaynaklar Yerleşkesi 35160, Buca _Izmir, Turkey.
Color versions of one or more figures in this article are available online at www.tandfonline.com/vhim.
© 2016 Taylor & Francis Group, LLC
 146 € HANEDAR ET AL.
A. O.
relationship between the price of French National Defense
Loan bonds traded on the London Stock Exchange and
several war-related events during WWI.
The partitioning of the Ottoman Empire by the Allies
and the emergence of the Turkish National Movement1
were important results of WWI, which officially ended on
November 11, 1918. The Turkish War of Independence
began as a reaction to the occupation of the Ottoman
Empire by the Allies. The Ottoman state failed to pay
coupons of the government bonds when WWI began. On
the other hand, the redemption of the bonds was still
under guarantee of the Ottoman Public Debt Administra-
tion (OPDA) (Borsa Rehberi 1990b, 121; Yeniay 1964,
110). However, the money collected by the OPDA to pay
the debts was taken by the Turkish National Movement
to finance war expenditure (Yeniay 1964, 110–11).
At the end of the Turkish War of Independence, the
Republic of Turkey was formed on October 29, 1923
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and, after several negotiations, agreed to pay 67.1% of
the Ottoman Empire’s foreign debt (Eldem 1994, 229).
This settlement was made at the Treaty of Lausanne on
July 24, 1923.2 Nonetheless, investors knew that parts of
their debts would become the responsibility of the
victors, together with the OPDA. As WWI came to an
end, the redemption and supervision of the Ottoman
debts was reconsidered at the Paris Peace Conference on
January 18, 1919 and the Conference of London on
February 12, 1920. These conferences led to the Treaty
of Sevres on August 10, 1920, but it was never adopted
due to the Turkish War of Independence (Helmreich
1974; Eldem 1994, 153–8).3 The future payment of these
bonds was related to the end of conflicts between the
Allied forces and the Turkish National Movement, lead-
ing to difficulties in economic and political life.
There is no well-documented information on the
impact of the conflicts between 1918 and 1925 on the
_
Istanbul bourse. Hayrettin Kazgan (1995, 106) and
Kazgan and colleagues (1999, 412) pointed out that
Ottoman government bond prices on the Istanbul _ Our results reflect break points that correspond to
bourse recovered after the Allies began to leave the
occupied areas. In addition, a commentary in Vakit,
_
the widely read newspaper in Istanbul, reported that
an inflow of gold into the Ottoman Empire was
expected by investors as WWI came to an end, which
led to an increase in the number of government bonds
bought (Vakit 1918c, 2). Government bond prices had
increased prior to the treaties being drawn up in the
aftermath of WWI. We deal with the relationship
between the war-related events during WWI and the
expectations of investors, related to the fate of the
Ottoman state and bonds. Even if a peace agreement
did not include terms for the repayment of bonds, the
increased probability of the end of hostilities would
mean lower costs for future redemption of the bonds.
The peace would have decreased war-related expendi-
tures and deficits. As a result, there would be higher
volatility in the prices of bonds that had interruption
in their payments due to capital inflows. With this in
mind, we examine whether war-related events were
associated with volatility in prices of government
_
bonds traded on the Istanbul bourse between 1918 and
1925, focusing on the structural break points in price
variances for government bonds issued before WWI.
We contribute to the limited empirical literature
about the effects of war-related events and risks on
_
bond prices by using a dataset based on the Istanbul
bourse. Specifically, our article represents the first
study that examines the effects of the Turkish War of
Independence on bond prices during the transition
period from the Ottoman Empire to the Republic of
Turkey. The results also help in understanding the
expectations on the outcomes of war-related events in
the Ottoman Empire, which are not empirically dis-
cussed in the historical literature. The case we examine
is also informative in terms of understanding the
financial situation due to the war threats. To identify
sudden changes in the volatility of bond prices, we use
manually collected data for prices of two of the most
_
attractive government bonds traded on the Istanbul
bourse between 1918 and 1925. The break points are
selected endogenously by the method developed by
Inclan and Tiao (1994), without any prior information
on the distribution of series and break dates. We iden-
tify the sudden changes in volatility of the bond prices,
as Inclan and Tiao (1994) argued that risk perceived
by the bondholders could be better measured with
breaks in variance or volatility, rather than sudden
changes in financial series, which is assumed by Jushan
Bai and Pierre Perron’s (1998, 2003) method. One of
the most important contributions of our article stems
from the novelty of the method.
war-related events such as the Armistice of Mudros,
political and military victories of the Turkish National
Movement and the Allies, and treaties that prepared
the way for the end of WWI for the Ottoman Empire.
During these events, government bond prices
increased, as there were sudden changes in volatility,
which could have arisen from higher demand for gov-
ernment bonds. This implies lower risk assessment for
the fate of the Ottoman state and issuing bonds among
investors, as wars were ending. Interestingly, the find-
ings do not show the intensity of risks perceived by
investors during several events, such as the occupation
_
of Izmir, in contrast to the arguments in the historical
literature.

WWI had caused severe economic problems. There
were restrictions imposed by the Allies, leading to a huge
decrease in Ottoman foreign trade. As the war increased
expenditure, it became more difficult to finance the bud-
get deficits of the Ottoman Empire. To fund its war
expenditure, the Ottoman state issued war bonds, bor-
rowed abroad, and increased the supply of paper money,
which led to higher inflation. Because of deserters, there
were security problems within the Ottoman Empire
which hampered trade and production (Eldem 1994, 25,
131; Pamuk 2000, 223–4; 2005). Based on the findings,
peace was economically better than war, which is in line
with the arguments in Celal Erikan (2008, 18).
During the Allies’ occupation, commissioners were
appointed to rule the Ottoman Empire. All the economic
and financial affairs of the Ottoman Empire must be
approved by the commissioners. The Ottoman Empire
was divided into several regions, each of which was occu-
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pied by one of the Allies. All forms of restrictions over
international trade and the transit of goods passing
through the Ottoman Empire were lifted, which led to
high current account deficits. Furthermore, the Ottoman
government did not exercise political and economic con-
trol over places that the Turkish National Movement
claimed to have sovereignty. Moreover, conflicts with the
Allies led to transportation network and market disrup-
tions, and as a result, reduced trade flows and produc-
tion. There was a significant change in this situation over
time, following the signing of the Treaty of Lausanne on
July 24, 1923, after the victories of the Turkish National
Movement. The Republic of Turkey imposed high tariffs
on imports and promoted production and trade. The
control of the Allies over the Ottoman economy and
finance was largely removed, which led to higher tax col-
lection capacity of the state (Eldem 1994, 137–58, 164–
88, 220–9).
The end of both WWI and the hostilities with the
Allied forces meant lower inflation, expenditure, and
budget deficits, which could have led to lower costs for
the future redemption of the debts. The findings imply
that a possibility of peace could have carried substantial
economic benefits, as reflected on the Istanbul_ bourse.
These outcomes of the end of conflicts did not come as a
_
surprise to the bondholders at the Istanbul bourse who
would have taken heavy losses due to the financial risk of
wars.
The rest of this article is structured as follows: the next
_
section presents the historical background of the Istanbul
bourse and how war-related news disseminated to the
investors in the Ottoman Empire. The third section
introduces the dataset that was manually collected. The
fourth section presents the methodology, developed by
Inclan and Tiao (1994), used to identify the structural
HISTORICAL METHODS 147
break points. The fifth section discusses the empirical
results, and the final section contains the conclusion.
_
Wars and the Istanbul bourse during the
dissolution of the Ottoman Empire
In the nineteenth century, the Ottoman state had large
budget deficits because of its limited fiscal sources, ineffi-
cient tax system, wars, and reforms. To finance the defi-
cits, local money lenders (i.e., the Galata Bankers in
_
Istanbul) provided money. Also, it had often devalued
the Turkish Lira until 1844. Due to more favourable
terms given to foreign investors, in comparison to the
local money lenders, the Ottoman state began to borrow
abroad after the Crimean War (1853–6) by issuing the
Konsolid bond (Kıray 1995, 83–4; Pamuk 2000, 204, 208,
210; Toprak 2008, 145).
This Treasury bond was attractive for investors in the
Paris and London Stock Exchanges. There was a growing
_
informal trade of bonds in Istanbul (Borsa Rehberi-1928
1990a, 15–6; Kazgan et al. 1999, 371–75; Fertekligil 2000,
15, 23). The stocks of European joint-stock firms had
already been attractive for investors in the Ottoman
Empire. To regulate the growing trading activities over
time, in 1866, the Ottoman state decided to found a for-
_
mal market, that is, the Istanbul bourse, known as the
_Istanbul Bond Market (Dersaadet Tahvilat Borsası) (Kaz-
gan et al. 1999, 371–5; Toprak 2008, 151). The regula-
_
tions were borrowed from Europe, as the Istanbul bourse
was controlled through a committee and chairman
appointed by the Ottoman state. Traders (Mubayaacıs)
conducted open auctions via brokers (Dellals) and mid-
dlemen (Simsars) (Borsa Rehberi-1928 1990a, 112–8;
Fertekligil 2000, 36; Toprak 2008, 151).
In a relatively short period, the volume of trade on the
_
Istanbul bourse had reached a substantial level. There
_
had not been many financial assets issued on the Istanbul
bourse in the 1870s, but 104 bonds and stocks were
traded in 1914. Foreigners, Allied soldiers, bankers, gov-
ernment officers, and even ordinary people bought large
numbers of bonds which were then traded on the
_
Istanbul bourse (Fertekligil 2000, 44–5, 82, 89–90, 102–3;
Kazgan 1995, 95; Kazgan et al. 1999, 344, 375, 406).
WWI led to catastrophic results for the Ottoman Empire.
_
However, the activities of the Istanbul bourse were
largely uninterrupted after the end of WWI. Also, impor-
tant regulatory activities could only take place in the
_
Istanbul bourse after 1923 (Borsa Rehberi-1928 1990a,
19; Kazgan 1995, 103–10). The historical literature on
_
the Istanbul bourse provides some information on the
sensitivity of Ottoman government bond prices to war-
related news. Kazgan (1995, 106) and Kazgan and col-
leagues (1999, 412) indicated that there was a recovery in
 148 € HANEDAR ET AL.
A. O.
government bond prices as the Allies left occupied areas
in 1922. These events show that the bondholders were
sensitive to war-related news. On October 7, 1918, an
Ottoman newspaper, Vakit, reported that investors had
begun to buy government bonds instead of gold, due to
news that WWI would end in the near future (Vakit
1918c, 2). A commentary published in Ikdam _ before
WWI showed how quickly war-related news circulated
and affected government bond prices. The commentary
reported that on September 23, 1911, prices of govern-
ment bonds decreased, as news on the tensions between
the Ottoman Empire and Italy over Libya disseminated.
Bondholders were aware that this news was misguiding
_
in the short-term, which led to higher prices (Ikdam
1911, 1). In line with the argument in this commentary,
Hanedar and colleagues (2015) empirically showed a
correlation between volatility in the prices of the Otto-
_
man government bonds traded on the Istanbul bourse
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and several events such as the Turco-Italian War. Simi-
larly, Mauro and colleagues (2006) found that yields of
emerging countries’ bonds, including the Ottoman gov-
ernment bonds, traded on the London Stock Exchange
were related to wars and violence before WWI.
Data
We used manually collected daily closing prices of the
Rumelia Railway and the Treasury bonds traded on the
_
Istanbul bourse, as little data were available on prices of
the other government bonds.
The data were collected from the available volumes of
the Tasvir-i Efkar, Tevhid-i Efkar, Tanin, and Takvim-i
Vekayi, the daily Ottoman newspapers, published in
_
Istanbul. The newspapers reported the opening and clos-
ing prices of several bonds and stocks in a column. These
newspapers are available in the Hakkı Tarık Us Collec-
tion, which is currently kept at the Beyazıt State Library
_
in Istanbul. The price data are only available from May
25, 1918 to February 28, 1925. In the data sources, the
bond prices are denominated in Turkish Liras.
Takvim-i Vekayi was the first newspaper to be fully
published in Turkish. It was established as the official
newspaper of the Ottoman Empire and launched in
1831. In addition to Takvim-i Vekayi, we used different
newspapers, as some issues were not found and there
were no reported price data in several issues. Tanin was
a pro-government newspaper. It was not published when
_ Methodology
Istanbul was under Allied occupation. Tasvir-i Efkar,
launched in 1862, supported the Turkish National Move-
ment and was closed down several times, so it was pub-
lished with a new name, Tevhid-i Efkar.
The bonds were the two most actively traded bonds on
_
the Istanbul bourse. In particular, the Rumelia Railway
bond was known as the Turkish Lottery bond, providing
€ uksel 2014, 16). The
prizes to attract small investors (Ozy€
Rumelia Railway and Treasury bonds were the biggest
government bonds in terms of value, as with those bonds,
the Ottoman state collected 79,200,000 and 42,275,772
Turkish Liras, respectively (Borsa Rehberi-1928 1990b,
337). The trade volume of the Rumelia Railway bond was
34,652,640 Turkish Liras from December 8–20, 1881.
This was the highest figure, as compared to those of the
_
other bonds traded on the Istanbul bourse between simi-
lar dates (Borsa Rehberi-1928 1990b, 90). It is important
to note that there is no detailed information in the histori-
cal literature on the bond turnover or the bondholders for
the sample period. On the other hand, the prices of bonds
were reported in the newspapers when there was signifi-
cant trading activity (Vakit 1919, 2).
The Rumelia Railway bond was issued to fund the
construction of railroads connecting Istanbul _ to
4
Rumelia, with an interest rate of 3%. The bond had a
face value of 400 French francs. A total of 1,980,000
bonds, with a 104-year maturity, were issued on March
10, 1870 and September 12, 1872. As the financial situa-
tion in the Ottoman state was so bad, the Ottoman state
provided prizes six times a year. Baron de Hirsch, who
was the constructer of the Rumelia railroads, bought all
bonds from the Ottoman state. Then the bonds were
sold to a dealer who offered the bonds to the public. The
bonds were lumped into the general Ottoman debt, as
the Republic of Turkey would have declared that it would
repay the same share of the bonds (Yeniay 1964, 43–4,
116–33). On the other hand, there is a lack of informa-
tion on the coupon payment of the Rumelia Railway
bond.
The Treasury bond was a consolidated bond. Some
1,488,126 consolidated bonds were sold on September 1
and 14, 1908 with face values of 22, 110, and 550 Turkish
Liras to pay old debts except those of the Rumelia Rail-
way bond. The bonds yielded 4% interest (Yeniay 1964,
90–1; Borsa Rehberi-1928 1990b, 86, 100, 336). The cou-
pon payment of the Treasury bond was done in March
and September of each year (Akyıldız 2001, 344). There
is no detailed information on the maturity date of this
bond. The Ottoman state would have paid similar bonds
issued in these years, based on between a 50- and a
100-year maturity date (Akyıldız 2001; Yeniay 1964).
To identify sudden changes in volatility of the Rumelia
Railway and the Treasury bonds, we used the economet-
ric methodology developed by Inclan and Tiao (1994).
This method proposes an iterated cumulative sum of
squares (ICSS) algorithm, detecting the number and date

of breaks for variances as follows:
Dk D .Ck = C CT / ¡ .k=T/ k D 1; :::::; T with D0 D Dk D 0
(1)
P Hungary invaded Serbia. There were increased tensions
where Ck D kt D 1 e2t is a cumulative sum of square resid-
uals between the beginning of the series and the kth point
in time. The ICSS methodology assumes stationary vari-
ance over the time period until a sudden change occurs.
The variance is stationary until another sudden break is
detected. ICSS methodology focuses on different sub-
samples that are determined by sudden changes. The
absence of changes in variances over the sample period
implies an oscillation in the Dk statistic against k around
zero. Dk will be different from zero if there are breaks in
the variances. This means that if the maximum absolute
value of the Dk is greater than the critical value, the null
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hypothesis of absence of sudden changes can be rejected.
Inclan and Tiao (1994) proposed the identification
of the structural breaks in conditional volatility as
any higher risks perceived by investors are reflected
in changes in variances or volatility, rather than those
in bond prices or returns. This means that instabil-
ities in an economy are related to the sudden changes
in volatility of financial market outcomes, due to
political and economic crises. Therefore, it is superior
to the method of Bai and Perron (1998, 2003), which
was recently used by Waldenstr€om and Frey (2008)
to examine the impacts of war-related events on bond
prices in Nordic countries during WWII. Addition-
ally, ICSS detects the break points in the series
endogenously, without exogenous identification of the
maximum number of break points. Moreover, this
method is a non-parametric method, which does not
require prior specification of distribution, as did alter-
native methods.5
As bond prices may not be stationary, we used returns
for the prices of bonds, which were calculated as follows:
Rt D ln.Pt =Pt ¡ 1 / (2)
where Pt reflects the daily price of government bonds in
time t when volumes of the Ottoman newspapers were
available.6
Results
Descriptive results
In Figure 1, the daily closing prices of the Rumelia
_
Railway and Treasury bonds traded on the Istanbul
bourse are presented. There was a strong downward
trend in bond prices in the long-term. However, the
HISTORICAL METHODS 149
two bond prices follow two different paths, which does
not indicate similar default risks. This could be attrib-
uted to the fact that wars affected regions where rail-
roads were located.7
WWI officially began on July 28, 1914 when Austria-
between Serbia and Austria-Hungary after Serbian
nationalists killed Archduke Franz Ferdinand on June
28, 1914, in Sarajevo. Russia, Germany, the United King-
dom, and France had joined the war by August 4. The
Ottoman Empire decided not to join the war at the
beginning, but with the encouragement of Germany, it
declared war on the Allied forces on November 2
(Erickson 2001, 25, 27, 32–42; Henig 2002, 3–4, 14, 16,
18–9, 20, 22–4).
Figure 1 indicates a very slight decrease in bond prices
between May and August 1918, when the Allied forces were
being steadily successful in their campaign on the Western
Front (Terc€ uman-ı Hakikat 1918, 1; Bayur 1983, 663–4;
Tuncer 2011, 127–9).
Bulgaria signed an armistice on September 29, 1918,
which also prepared the way for the end of the war for the
Ottoman Empire, with the Armistice of Mudros on October
30 (Tuncer 2011, 131–2). Germany had signed an armistice
on November 11, which officially ended the war in favour of
the Allied forces (Bayur 1983, 663, 673–6, 696) (see Table 1
for details of key military and political events).
As can be seen in Figure 1, while WWI was nearing its
end in favour of the Allied forces, in October, bond pri-
ces increased. On the other hand, the Armistice of
Mudros led to lower bond prices for a short period.
The Armistice of Mudros was followed by occupa-
tion by the Allies in several parts of the Ottoman
Empire. The Allied forces gradually increased their
control of important places, such as Istanbul, _ after
_
November 12, 1918. The occupation of Izmir by Greek
forces on May 15, 1919 was an important event, which
led to rebellion against the Allies by the Ottoman
army and ordinary people. These invasions had not
always taken place in accordance with the Armistice of
Mudros. The invasion of Izmir _ was made possible by
the support by the Allies of Greece during the Paris
Peace Conference on January 18, 1919. It was arranged
to prepare treaties that would be signed by the
defeated countries. There, they discussed the occupa-
tion of different parts of the Ottoman Empire (Erikan
€
2008, 21–4; Ozsoy 2008, 96–8; Tuncer 2011, 160–7).
People anticipated serious hostilities as a result of
the occupations in 1918 and 1919. For instance,
directors of the Imperial Ottoman Bank, which was
the main agent for the Treasury bond issue, were
expecting a civil war (Autheman 2008, 107). As
expected, there were various forms of resistance by
 150 € HANEDAR ET AL.
A. O.
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Figure 1. The prices of Rumelia Railway and Treasury bonds, 1918–25 (Turkish Liras). Note. The prices of the Treasury and the Rumelia
Railway bonds are denominated in Turkish Liras. The data come from Tasvir-i Efkar, Tevhid-i Efkar, Tanin, and Takvim-i Vekayi, 1918–25.

people against the Allied forces (Erikan 2008, 47–51). Allies had convened the Paris Peace Conference. As
In Figure 1, we observe peaks in both bond prices at serious conflicts with the Allied forces broke out in
the beginning of February 1919, shortly after the the occupied areas, lower bond prices were seen.

Table 1. Key military and political events during the end of WWI and the Turkish War of Independence.
Date Event

September 29, 1918 The Armistice of Salonica was signed by Bulgaria.

October 30, 1918 The Armistice of Mudros was signed by the Ottoman Empire.
November 11, 1918 The Armistice of Compiegne was signed by Germany, which officially ended WWI.
November 13, 1918 The occupation of _Istanbul
January 18, 1919 The organization of the Paris Peace Conference to set peace terms for the Central Powers
May 15, 1919 The occupation of _Izmir
June 21, 1919 A meeting in Amasya was held to organize a national defence against the Allies’ occupation.
February 12, 1920 The Conference of London
April 23, 1920 A new government in Anatolia was established by the Turkish National Movement.
August 10, 1920 The Treaty of Sevres was signed between the Allies and the Ottoman Empire.
August 23–September 13, 1921 The defeat of Greece in the Battle of Sakarya
March 22, 1922 The Allies asked for an armistice to the Turkish and Greek forces.
August 26–30, 1922 The victory of the Turkish National Movement in the Battle of Dumlupınar
October 11, 1922 The Armistice of Mudanya was signed to end the hostilities.
July 24, 1923 The end of Allies’ occupation with the Treaty of Lausanne
October 29, 1923 The foundation of the Republic of Turkey

_
In Izmir, Sivas, Erzurum, and Trabzon, several organ-
izations were founded to discuss how to react against the
occupations. On June 21, 1919, a protocol was reached
in Amasya whereby Turkish rebels agreed to organize a
national movement against the Allies. This protocol was
followed by a series of meetings in different parts of
Anatolia by mid-September of 1919, leading to the foun-
dation of the Turkish National Movement and national
resistance (Shaw and Shaw 2002, 343–4). Figure 1 indi-
cates a slight increase in bond prices during June and
September of 1919. However, although the Allies made
decisions on the redemption of the debts in the Confer-
ence of London on February 12, 1920, the bond prices
decreased.
The hostilities against the Allied forces became more
_
severe after 1919 with the de facto occupation of Istanbul
on March 16, 1920. In addition, the break-up of the
Ottoman Empire was officially declared in the Treaty of
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Sevres on 10 August 1920 (Erikan 2008, 119–128; Ozsoy€
2008, 283–6). Figure 1 shows that the decline in bond
prices since January 1919 continued, even after the
Treaty of Sevres.
A new government in Anatolia was established on
April 23, 1920 by the Turkish National Movement. This
government was the representative of the government in
_
Istanbul, which was now under the control of the Allied
forces. The National Movement began to provide gov-
ernment services and recruited soldiers until the occupa-
tion by the Allied forces ended (Erikan 2008, 47–51,
€
101–18; Ozsoy 2008, 163–217, 250–5). As shown in
Figure 1, there was an increase in bond prices after April
1919. At the beginning, the Turkish National Movement
failed to gain any important victories against the Allied
forces. On the other hand, several conflicts in the south-
ern part of Anatolia (e.g., Maraş), which was occupied
by France, ended with the success of the Turkish
National Movement. After mid-January 1921, the Turk-
ish National Movement gained victories against Greece.
The Battle of Sakarya in mid-September 1921 ended the
hostilities for a while as support of the Allies for Greece
€
had dwindled (Ozsoy 2008, 341–67). There were treaties
signed with France and Italy in mid-November 1921,
which gradually ended French and Italian occupation
_
(Ikdam 1921, 1; Tevhid-i Efkar 1921a, 1; 1921b, 1).
Figure 1 indicates a very slight increase in bond prices
after mid-November, but this increase did not continue
for very long. Prices recovered again after May 1922, as
in mid-March the Allies proposed peace negotiations to
finalize the conflicts between the Turkish National
Movement and Greece (Erikan 2008, 301–2).
There was a reduction in bond prices after July 1922,
with the increase in tensions with Greece. Different edi-
tions of Tevhid-i Efkar reported that Greek soldiers had
HISTORICAL METHODS 151
been sent to Western Thrace. In addition, Greece offi-
_
cially declared its desire to occupy Istanbul, by issuing an
ultimatum (Tevhid-i Efkar 1922a, 1; 1922b, 1). Moreover,
final victory for the Turkish National Movement came
with the Battle of Dumlupınar against Greece, which had
taken place from August 26–30, 1922. Figure 1 indicates
a decline in government bond prices prior to the Battle
of Dumlupınar, and this reduction continued even after
this victory.
On October 11, 1922, the Turkish National Move-
ment signed the Armistice of Mudanya, which confirmed
the defeat of the Greek forces in Anatolia. On November
4, 1922, the Turkish National Movement gained control
over the financial affairs of the Ottoman Empire, after
the abolishment of the Sultanate. On July 24, 1923, the
Treaty of Lausanne was signed with the Allied forces,
who then left the areas they had been occupying. The
continuing state (i.e., the Republic of Turkey) was offi-
cially founded on October 29, 1923, and it inherited
institutions and debts of the former state (Dumberry
€
2012, 255; Eldem 1994, 148; Ozsoy 2008, 381–422).
Figure 1 shows a large fall in prices just after the
Armistice of Mudanya was signed. Furthermore, this
decrease continued after November 1922, when the
Turkish National Movement began to manage the finan-
cial affairs of the Ottoman Empire (Eldem 1994, 148). A
peace conference in Lausanne was organized with the
Allied forces on November 20, 1922. Negotiations took
many months due to debates and protests (Erikan 2008,
405–1), which led to fluctuations in bond prices. When
the Treaty of Lausanne was finally signed, a small
increase in prices was observed. Prices became stable
after the Republic of Turkey had been officially
established on October 29, 1923.
Identification of break times
Table 2 reports break points in the volatilities of Rumelia
Railway and Treasury bond returns. The basis points in
column 3 show percentage change in the bond prices in
the break points (see Table 2 for details). This allows us
to separate the effects of different war-related events. For
instance, the beginning of the Turkish War of Indepen-
dence might have led to a decrease in prices, but the
increased possibility of a peace agreement which ended
the conflicts with the Allies could have led to an increase
in prices. In both cases, there would be high volatility
because of capital outflows and inflows.
As shown in Table 2, the break times for volatility of
Treasury and Rumelia Railway bond returns are differ-
ent. This implies that the default risks of the bonds are
not similar, due to their different characteristics. The
Rumelia Railway bond price was related to the future of
 152 € HANEDAR ET AL.
A. O.
Table 2. Structural break points in variances of Rumelia Railway and Treasury bonds’ returns, 1918–25.
Bonds Break dates
Rumelia Railway Bond May 30, 1918
August 22, 1918
October 30, 1918
November 16, 1918
Treasury Bond July 17, 1918
July 20, 1918
September 12, 1918
November 19, 1921
December 29, 1921
February 8, 1922
Note. This table presents the break dates in variances of bond returns. Basis points that reflect the percentage change in average bond prices after and before the
break.
railroads located in places which were under the occupa-
tion of the Allied forces, that is, Eastern Thrace, by 1923.
There are break points in both the Rumelia Railway
and the Treasury bonds, identified before the Armistice
of Mudros. The breaks increased the price of the Rumelia
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Railway bond by 16% and 18%, as there were 50%, 50%,
and 53% increases in the price of the Treasury bond.
Figure 2 presents the Treasury and Rumelia Railway
returns and corresponding break dates, implying that
there were higher fluctuations in the returns around
these break points. The sudden change in the volatility of
the Rumelia Railway bond price on May 30, 1918 coin-
cides with a series of attacks by the Central Powers on
_
the Western front. Ikdam argued that these attacks were
_
successful (Ikdam 1918d, 1), but the Central Powers
were steadily defeated by the Allies after mid-June 1918.
On June 15 and 16, 1918, Terc€ uman-ı Hakikat dissemi-
nated the news that Germany was prepared to propose a
peace treaty with the Allies (Terc€ uman-ı Hakikat 1918d,
1). By August 8, there was a belief among Turkish army
officers that Germany had lost the war (Bayur 1983,
663–4; Tuncer 2011, 127–9). On September 11, 1918,
Vakit reported the retreat of the Central Powers on the
Western front (Vakit 1918a, 1). From mid-September
1918, investors were able to believe that the war would
end and the debt would be repaid, as there would no lon-
ger be any extraordinary war-related expenditure by the
Ottoman state. The finding is not in line with the argu-
ment of a commentary in Vakit, stating that people did
not expect a short war until Bulgaria had asked for an
armistice at the end of September 1918 (Vakit 1918b, 2).
Another break point in the Rumelia Railway bond
occurs on October 30, 1918. This corresponds to the
Armistice of Mudros, which led to an increase in bond
price by 10%. On October 30, a commentary in Ikdam _ increase on November 19 is lower in magnitude than
(1918b, 1) reported that the Allies would soon sign an
armistice with the Ottoman Empire. Due to the armi-
stice, high government expenditure during the war years
would have decreased, as the Ottoman Empire would
have demobilised its army (Tuncer 2011, 140). Also,
Basis points Events
16 The attacks of the Central Powers
18 The defeat of the Central Powers
10 The Armistice of Mudros
11 The occupation of _Istanbul and the end of the WWI
50 The defeat of the Central Powers
50 The defeat of the Central Powers
52 The retreat of the Central Powers
46 The victories of the Turkish National Movement
51 The victories of the Turkish National Movement
55 The Turkish National Movement sent a representative
committee to negotiate with Allies.
reduction in trade due to WWI could have disappeared,
_
as before the signing of the Armistice of Mudros, Ikdam
disseminated several of its terms whereby the Allies
_
would control the Straits without occupying Istanbul,
which would lead to a lifting of the blockade on com-
_
merce with the Allied forces (Ikdam 1918a, 1).
The increase in the bond price was lower than that of
other break points. In addition, Figure 1 indicates a sud-
den decrease in prices after October 30, 1918. This can
be related to the political instability in the Ottoman
Empire. Investors could expect a higher default risk than
before as leaders of the Ottoman Empire during wartime
_
fled abroad shortly after the armistice was signed (Ikdam
1918c, 1). Additionally, the grand vizier resigned and a
new cabinet began to be formed on November 11
(Tasvir-i Efkar 1918b, 1).
A break in the Rumelia Railway bond is observed on
November 16, 1918, resulting in an 11% increase in the
price. The break came after Allied fleets arrived in
_
Istanbul and Germany signed an armistice (Tasvir-i
Efkar 1918a, 1; 1918c, 1). This increase is higher in mag-
nitude than that of the third break point. This could
have confirmed the low probability of resistance in the
_
near future due to the Allies’ occupation in Istanbul and
the defeat of the Central Powers, which corresponds to
lower risks on the repayment of bonds.
It seems that investors could not predict the out-
break of a conflict between the Allies and the Turkish
National Movement. On the other hand, breaks in
the Treasury bond are identified on November 19
and December 29, 1921. Figure 2 indicates the inten-
sity in the fluctuations of the returns after these break
points. This could be due to capital inflows, as the
break points led to an increase in the bond price. The
that of previous break points. The break on 29
December led to a higher bond price. This could
imply the decline in the risks for the future redemp-
tion of the bonds, as investors believed the hostilities
between the Allies and the Turkish National

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Figure 2. Variances of Rumelia Railway and treasury bond returns, 1918–25. Note. This figure shows returns of the bonds with corre-
sponding break dates as estimated in equation (2).
Movement would soon end after the Turkish National
Movement had signed a treaty with France that gave
back all the lands that it had occupied in November
_
(Ikdam 1921, 1). The Turkish National Movement
would soon make a similar agreement with Italy (Tev-
hid-i Efkar 1921b, 1). On December 27, French forces
left Adana, an important occupied province (Tevhid-i
_
Efkar 1921a, 1), quickly went to Istanbul, and bought
a large number of government bonds (Kazgan 1995,
106; Kazgan et al. 1999, 412). Vedat Eldem (1994,
157) argued that the defeat of Greece at the Battle of
Sakarya in mid-September 1921 and France’s leaving
HISTORICAL METHODS 153
of the places it had occupied brought peace negotia-
tions. The last break in the Treasury bond is observed
on February 8, 1922. There was a 55% increase in the
bond price, the highest increase so far. The only war-
related event that occurred then was that a committee
from the Turkish National Movement was sent to
Europe, on February 7, to visit London, Paris, and
Rome in order to explain the reasons for the Turkish
National Movement’s fight against the occupants
(Tevhid-i Efkar 1922c, 1). Although these visits were
not successful in finalizing the hostilities with Greece
imminently, they could be interpreted as success for
 154 € HANEDAR ET AL.
A. O.
the Turkish National Movement against the Allied
forces, as it seems that the new republic was recog-
nized by the Allied forces (Erikan 2008, 301–2),
which would have led to lower risks. After about one
month, in mid-March, there were peace offers made
for a short time by the Allied forces to end the hostil-
ities with Greece (Terc€
uman-ı Hakikat 1922, np).
Conclusion
This article contributes to the limited literature on the
effects of war-related risks on bond prices by using a
manually collected historical dataset, based on the
_
Istanbul bourse. We focus on sudden changes in the vol-
atilities of returns for the Rumelia Railway and Treasury
bonds from 1918–25. We argue that the break times can
be related to war-related events which led to changes in
risk assessments on the fate of the issuing state and
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bonds among investors, as reflected in government bond
prices.
By using the methodology proposed by Inclan and
Tiao (1994), our empirical results do not indicate the
same break points for the volatilities of the Rumelia Rail-
way and Treasury bond returns, possibly due to different
perceptions on the default risks of the bonds. Specifically,
for both bonds, break points were identified prior to the
Armistice of Mudros, indicating a gradual increase in
bond prices after May 1918, which was generally associ-
ated with the defeat of the Central Powers. The other
break points in volatility of price for the Rumelia Railway
bond, observed on October 30 and November 16, 1918,
corresponded to the Armistice of Mudros, the end of
WWI with the Armistice of Compiegne, and the begin-
_
ning of the occupation in Istanbul. The bond prices
decreased for a short period after the Ottoman Empire
signed the Armistice of Mudros, which coincided with
domestic political crises in the Ottoman Empire. Except
for this short-run reduction, there was an upward trend
in bond prices until early 1919. For the Treasury bond,
other break points occurred on November 19 and
December 29, 1921, and on February 8, 1922, coinciding
with the successes of the Turkish National Movement,
which led to the peace negotiations.
Eldem (1994) and Şevket Pamuk (2005) were com-
prehensive studies on the Ottoman economy during the
dissolution of the Ottoman Empire, given the lack of
available historical data. Our study further deepens the
understanding of government finance and bond markets
during the transformation of the Ottoman Empire to the
Republic of Turkey, by presenting previously unused
_ debt had already begun (Eldem 1994, 226–8; Yeniay 1964,
empirical evidence and historical data on the Istanbul
bourse. The results provide information on the negative
effect of peace on the risk assessments of bondholders as
well as on budget deficits of the Ottoman state. Wars
increase inflation, government expenditure, and debt
burden, leading to higher default risk. On the contrary,
as hostilities were ending, investors could have expected
that government debts could be serviced. This resulted in
higher prices and volatilities of government bonds due to
capital inflows, through lower risk for repayment of
Ottoman debts. The findings imply that there were sev-
eral war-related events that brought messages of peace to
the investors, explaining the existence of the sudden vol-
atility changes prior to the formal end of WWI and con-
flicts between the Allied forces and the Turkish National
Movement. Accordingly, it can be argued that the reduc-
tion in risks for the redemption of the Ottoman debts
could have been foreseen by investors holding Ottoman
government bonds. This is an issue which has not been
empirically examined in the historical literature before.
_
Finally, the Istanbul bourse was effective in providing
information on costs of the war-related events during
the dissolution of the Ottoman Empire.
The obvious limitation of this article is that detailed
data for the number of the bonds in circulation, volume
of trade, the coupon payment of the Rumelia Railway
bond, and the investors’ profile in the Ottoman Empire
during the war years are not available. We could refine
this article following future research when these data are
found.
Acknowledgments
We are grateful for suggestions by three anonymous referees.
We thank Nurullah G€ ur, Ragıp Yılmaz, staff of the Dokuz
Eyl€
ul University library, participants of AGDEŞ seminar, and
students at the Turkish Military Academy for their feedback,
support, and helpful comments.
Notes
1. It was founded by Turkish revolutionaries to resist the
Allied forces in June 1919. They established a new govern-
ment and parliament in Ankara.
2. In the Conference of Lausanne during 1922 and 1923,
there were conflicting issues on the Ottoman debt. In par-
ticular, the allocation of the Ottoman debts to countries
within the borders of the Ottoman Empire during the fall
period was an important topic. The Conference led to the
Treaty of Lausanne, which each successor country
accepted to pay their shares in the Ottoman debts includ-
ing those taken for railway construction. The negotiations
on the share that would have paid by the Republic of Tur-
key to different creditor countries ended on March 22,
1933. However, on June 1, 1929, the repayment of the
116–239).
3. In the Armistice of Mudros and Paris Peace Conference,
discussion on the repayment of the debts remained
 HISTORICAL METHODS 155

limited. On the other hand, in the Conference of London
and the Treaty of Serves, the Allies primarily aimed to
protect their financial investments in the Ottoman
Empire. Thus, they decided to supervise the financial
affairs through a new financial commission by revising
the OPDA. This commission would control revenues and
make the Ottoman state more feasible to pay the pre-war
debts. Also, the debt was shared among the countries
within the borders of the Ottoman Empire during the fall
period as it was in the Treaty of Lausanne (Eldem 1994,
130–2; Helmreich 1974, 4–5, 194–5, 247–9, 291).
4. It was the name of the part of the Ottoman Empire in
Europe.
5. We also detect break points by using Bai and Perron’s
(1998, 2003) framework. As it is a parametric method, the
results are sensitive to the different data distribution
assumption and estimation frameworks, in contrast with
those of the ICSS test.
6. Following Mauro and colleagues (2006, 136) and Hanedar
and colleagues (2015), we use this definition of the bond
returns due to lack of information on the coupon payment
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