Endogenous Market Thinness and Stock Price Volatility
Thin equity markets cannot accommodate temporary bulges of buy or sell orders without large price movements: the resulting volatility can induce risk-averse transactors who face transaction costs to desert these markets altogether. Thus thinness and the consequent price volatility may become joint self-perpetuating features of an equity market, whatever the volatility of asset fundamentals. If, however, appropriate incentive schemes are adopted to encourage entry of additional investors, this vicious circle can be broken, eventually shifting the market to a self-sustaining, superior equilibrium, characterized by a higher number of transactors, lower price volatility and larger supply of the asset.
|Date of creation:||Dec 1986|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:146. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.