Why have asset price properties changed so little in 200 years

TL;DR

This paper reviews historical asset price fluctuations over 200 years, attributing their stability to innate trend-following preferences and collective arbitrage behaviors that create destabilizing feedback loops.

Contribution

It identifies two fundamental, unchanging mechanisms—innate trend following and arbitrage exploitation—that explain the persistent properties of asset prices.

Findings

Asset prices have experienced large fluctuations historically.

Trend following and arbitrage behaviors are key to price dynamics.

These mechanisms have remained unchanged for centuries.

Abstract

We first review empirical evidence that asset prices have had episodes of large fluctuations and been inefficient for at least 200 years. We briefly review recent theoretical results as well as the neurological basis of trend following and finally argue that these asset price properties can be attributed to two fundamental mechanisms that have not changed for many centuries: an innate preference for trend following and the collective tendency to exploit as much as possible detectable price arbitrage, which leads to destabilizing feedback loops.