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Market Participation, Information and Volatility

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Author Info
Juan Dubra () (Universidad de Montevideo)
Helios Herrera () (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

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Abstract

We analyze how the entry of less informed participants in a market for a risky asset affects the volatility of the price of the asset. In an endogenous participation model, we show that in equilibrium the new market entrants are less informed than the rest of the participants. We study how volatility depends on market participation and on the level of information of the participants. The condition that guarantees that new market participation leads to increased asset price volatility, is that all investors are sufficiently risk-averse. In the increasing volatility case, a higher volatility is associated with a higher welfare for the new entrants.

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File URL: http://ftp.itam.mx/pub/academico/inves/herrera/02-06.pdf
File Format: application/pdf
File Function: First version, 2002
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Publisher Info
Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0206.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 23 pages
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:cie:wpaper:0206

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Related research
Keywords: endogenous participation; volatility; information heterogeneity;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
D40 - Microeconomics - - Market Structure and Pricing - - - General
C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, 08. [Downloadable!] (restricted)
  2. Orosel, Gerhard O, 1998. "Participation Costs, Trend Chasing, and Volatility of Stock Prices," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(3), pages 521-57.
  3. Rohit Rahi & James Dow, 1998. "Informed Trading, Investment, and Welfare," FMG Discussion Papers dp292, Financial Markets Group. [Downloadable!] (restricted)
    Other versions:
  4. David Hirshleifer, 1988. "Residual Risk, Trading Costs, and Commodity Futures Risk Premia," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(2), pages 173-193. [Downloadable!] (restricted)
  5. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September. [Downloadable!] (restricted)
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  7. Chatterjee, Satyajit & Corbae, Dean, 1992. "Endogenous Market Participation and the General Equilibrium Value of Money," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 615-46, June. [Downloadable!] (restricted)
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  8. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(2), pages 309-41.
  9. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-55, September. [Downloadable!] (restricted)
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  10. Joël Peress, 2004. "Wealth, Information Acquisition, and Portfolio Choice," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 17(3), pages 879-914. [Downloadable!] (restricted)
  11. N. Gregory Mankiw & Stephen P. Zeldes, 1991. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02. [Downloadable!] (restricted)
    Other versions:
  13. Alexander Shapiro, 2002. "The Investor Recognition Hypothesis in a Dynamic General Equilibrium: Theory and Evidence," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(1), pages 97-141, March.
  14. Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, vol. 50(6), pages 1415-30, November. [Downloadable!] (restricted)
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  16. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December. [Downloadable!]
  17. Gadi Barlevy & Pietro Veronesi, . "Information Acquisition in Financial Markets," CRSP working papers 484, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    Other versions:
  18. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  19. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July. [Downloadable!] (restricted)
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  20. Pagano, Marco, 1986. "Market Size, the Informational Content of Stock Prices and Risk: A Multiasset Model and some Evidence," CEPR Discussion Papers 144, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  21. Pagano, Marco, 1989. "Endogenous Market Thinness and Stock Price Volatility," Review of Economic Studies, Blackwell Publishing, vol. 56(2), pages 269-87, April. [Downloadable!] (restricted)
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  22. Stephen Morris & Franklin Allen & Hyun Song Shin, 2004. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Yale School of Management Working Papers ysm346, Yale School of Management. [Downloadable!]
    Other versions:
  23. Pagano, Marco, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 255-74, May. [Downloadable!] (restricted)
    Other versions:
  24. José M. Marín & Rohit Rahi, 1997. "Speculative Securities," Economics Working Papers 223, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  25. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Helios Herrera, 2005. "Sorting in Risk-Aversion and Asset Price Volatility," Levine's Bibliography 172782000000000083, UCLA Department of Economics. [Downloadable!]
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This page was last updated on 2009-11-25.

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