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Participation Costs, Trend Chasing, and Volatility of Stock Prices

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  • Orosel, Gerhard O
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    Abstract

    We analyze an overlapping generations model with fixed costs of stock market participation. Participation in the stock market is determined endogenously and covaries positively with preceding innovations in dividends. The equilibrium share price is positively related to market participation of the same period and to information about future dividends. There is "rational trend chasing" in the sense that, although all agents are rational, market participation rises after an increase of the share price and falls after a decrease. Finally, we show that the endogenous fluctuations of market participation lead to increased volatility of the share price. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 11 (1998)
    Issue (Month): 3 ()
    Pages: 521-57

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    Handle: RePEc:oup:rfinst:v:11:y:1998:i:3:p:521-57

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    Cited by:
    1. Laurent Calvet & Martin Gonzalez-Eiras & Paolo Sodini, 2001. "Financial Innovation, Market Participation and Asset Prices," Harvard Institute of Economic Research Working Papers 1928, Harvard - Institute of Economic Research.
    2. Jack Favilukis, 2007. "Inequality, stock market participation, and the equity premium," LSE Research Online Documents on Economics 24500, London School of Economics and Political Science, LSE Library.
    3. Chiao, Chaoshin & Hung, Ken & Lee, Cheng F., 2004. "The price adjustment and lead-lag relations between stock returns: microstructure evidence from the Taiwan stock market," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 709-731, December.
    4. Giulia Iori, 2000. "A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions," Finance 0004007, EconWPA.
    5. Kim, Youngsoo & Lee, Bong Soo, 2007. "Limited participation and the closed-end fund discount," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 381-399, February.
    6. Aragon, George O. & Dieckmann, Stephan, 2011. "Stock market trading activity and returns around milestones," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 570-584, September.
    7. Juan Dubra & Helios Herrera, 2002. "Market Participation, Information and Volatility," Working Papers 0206, Centro de Investigacion Economica, ITAM.
    8. Helios Herrera, 2005. "Sorting in Risk-Aversion and Asset Price Volatility," Levine's Bibliography 172782000000000083, UCLA Department of Economics.
    9. Glaser, Markus & Weber, Martin, 2009. "Which past returns affect trading volume?," Journal of Financial Markets, Elsevier, vol. 12(1), pages 1-31, February.
    10. Challe, Edouard, 2008. "Endogenous participation risk in speculative markets," Economics Papers from University Paris Dauphine 123456789/12877, Paris Dauphine University.
    11. John M. Griffin & Federico Nardari & Rene M. Stulz, 2004. "Stock Market Trading and Market Conditions," NBER Working Papers 10719, National Bureau of Economic Research, Inc.
    12. Griffin, John M. & Nardari, Federico & Stulz, Rene M., 2005. "Do Investors Trade More When Stocks Have Performed Well? Evidence from 46 Countries," Working Paper Series 2005-12, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    13. Favilukis, Jack, 2013. "Inequality, stock market participation, and the equity premium," Journal of Financial Economics, Elsevier, vol. 107(3), pages 740-759.

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