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Market Participation, Information and Volatility

  • Juan Dubra

    ()

    (Universidad de Montevideo)

  • Helios Herrera

    ()

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

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 Function: First version, 2002
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Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0206.

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Length: 23 pages
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:cie:wpaper:0206
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