The fundamental statistical mechanism by which financial markets react to news remains stationary across major changes in regulation and economic conditions.

groundsUntitled source

Prices are not driven solely by real-world events, news, and people. When investors, speculators, industrialists, and bankers come together in a real marketplace, a special, new kind of dynamic emerges—greater than, and different from, the sum of the parts. To use the economists' terms: In substantial part, prices are determined by *endogenous* effects peculiar to the inner workings of the markets themselves, rather than solely by the *exogenous* action of outside events. Moreover, this internal market mechanism is remarkably durable. Wars start, peace returns, economies expand, firms fail—all these come and go, affecting prices. But the fundamental process by which prices react to news does not change. A mathematician would say market processes are "stationary." This contradicts some would-be reformers of the random-walk model who explain the way volatility clusters by asserting that the market is in some way changing, that volatility varies because the pricing mechanism varies. Wrong. A striking example: My analysis of cotton prices over the past century shows the same broad pattern of price variability at the turn of the last century when prices were unregulated, as there was in the 1930s when prices were regulated as part of the New Deal. ### Rule IV. Markets mislead. Patterns are the fool's gold of financial markets. The power of chance suffices to create spurious patterns and pseudo-cycles that,

groundsUntitled source

Markets have a personality. Prices are not driven solely by real-world events, news, and people. When investors, speculators, industrialists, and bankers come together in a real marketplace, a special new kind of dynamic emerges, greater than and different from the sum of the parts. To use the economist's terms, in substantial part, prices are determined by endogenous effects peculiar to the inner workings of the markets themselves, rather than solely by the exogenous action of outside events. Moreover, this internal market mechanism is remarkably durable. Wars start, peace returns, economies expand, firms fail. All these come and go, affecting prices. But the fundamental process by which prices react to news does not change. A mathematician would say market processes are stationary. This contradicts some would-be reformers of the random walk model, who explain the way volatility clusters by asserting that the market is in some way changing.