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Market Participation, Information and Volatility

Author

Listed:
  • Juan Dubra

    (Universidad de Montevideo)

  • Helios Herrera

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

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.

Suggested Citation

  • Juan Dubra & Helios Herrera, 2002. "Market Participation, Information and Volatility," Working Papers 0206, Centro de Investigacion Economica, ITAM.
    • Handle: RePEc:cie:wpaper:0206
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    References listed on IDEAS

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    Cited by:

    1. Helios Herrera, 2005. "Sorting in Risk-Aversion and Asset Price Volatility," Levine's Bibliography 172782000000000083, UCLA Department of Economics.
    2. Herrera, Helios, 2005. "Sorting in risk-aversion and asset price volatility," Journal of Mathematical Economics, Elsevier, vol. 41(4-5), pages 557-570, August.

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    More about this item

    Keywords

    endogenous participation; volatility; information heterogeneity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

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