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Trend-Following and Arbitrage as Persistent Sources of Market Instability

Article arXiv papers · Author: Jean-Philippe Bouchaud et al.
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Summary

The document asks why asset-price behavior appears to have changed little over roughly two centuries. It points to historical evidence of episodes with large price fluctuations and market inefficiency, then briefly reviews theoretical work and neurological explanations for trend-following. It offers a conceptual account of why these patterns may persist across eras.

The proposed explanation combines an innate human preference for following trends with widespread efforts to exploit observable arbitrage opportunities. Together, these behaviors can create destabilizing feedback loops in prices. The excerpt frames this as an argument grounded in historical review and prior research; it does not present new measurements, quantify the mechanisms’ relative importance, or specify a trading strategy. The claim is therefore a broad explanatory thesis rather than a demonstrated causal result in the material provided.

Key ideas

  • The authors review evidence of large fluctuations and market inefficiency across a long historical period.
  • They identify trend-following as a persistent human tendency that may shape price dynamics.
  • Collective attempts to exploit detectable arbitrage can contribute to destabilizing feedback loops.
  • The explanation combines behavioral and market mechanisms but does not quantify their effects in the excerpt.
  • The document presents a conceptual account rather than a trading strategy or new empirical test.

Tags

Trend followingArbitrageStatistics
Full text
# Why have asset price properties changed so little in 200 years


# Why have asset price properties changed so little in 200 years









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.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.