Limited Market Participation and Volatility of Asset Prices (Revision of 14-91) (Reprint 043)
AbstractTraditional theories of asset pricing assume there is a complete market participation, in the sense that all investors participate in all markets. In that case, preferences shocks typically have only a small effect on asset prices and are not an important determinant of asset price volatility. However, there is considerable empirical evidence that most investors participate in a limited number of markets. We show that limited market participation can amplify the effect of preference shocks, so that an arbitrarily small degree of aggregate uncertainty about preferences causes a large degree of price volatility. We also show there may exist Pareto-ranked equilibria, where the Pareto-preferred equilibrium is characterized by a different pattern of participation and lower volatility.
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Bibliographic InfoPaper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 02-92.
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- Franklin Allen & Douglas Gale, . "Limited Market Participation and Volatility of Asset Prices (Revision of 14-91) (Reprint 043)," Rodney L. White Center for Financial Research Working Papers 2-92, Wharton School Rodney L. White Center for Financial Research.
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- John Clark & Elizabeth Berko, 1997. "Foreign investment fluctuations and emerging market stock returns: the case of Mexico," Staff Reports 24, Federal Reserve Bank of New York.
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