IDEAS home Printed from https://ideas.repec.org/p/cie/wpaper/0206.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: http://ftp.itam.mx/pub/academico/inves/herrera/02-06.pdf
    File Function: First version, 2002
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," The Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-341.
    2. Annette Vissing-Jorgensen, 2000. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," Econometric Society World Congress 2000 Contributed Papers 1102, Econometric Society.
    3. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 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, February.
    4. Rohit Rahi & José M. Marín, 1999. "Speculative securities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(3), pages 653-668.
    5. Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Cowles Foundation Discussion Papers 1406, Cowles Foundation for Research in Economics, Yale University.
    6. Marco Pagano, 1989. "Endogenous Market Thinness and Stock Price Volatility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(2), pages 269-287.
    7. Gadi Barlevy & Pietro Veronesi, 2000. "Information Acquisition in Financial Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(1), pages 79-90.
    8. 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.
    9. Orosel, Gerhard O, 1998. "Participation Costs, Trend Chasing, and Volatility of Stock Prices," The Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 521-557.
    10. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
    11. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
    12. James Dow, 2003. "Informed Trading, Investment, and Welfare," The Journal of Business, University of Chicago Press, vol. 76(3), pages 439-454, July.
    13. 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 615-646, June.
    14. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
    15. Joël Peress, 2004. "Wealth, Information Acquisition, and Portfolio Choice," The Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 879-914.
    16. Alexander Shapiro, 2002. "The Investor Recognition Hypothesis in a Dynamic General Equilibrium: Theory and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 97-141, March.
    17. Vives Xavier, 1995. "The Speed of Information Revelation in a Financial Market Mechanism," Journal of Economic Theory, Elsevier, vol. 67(1), pages 178-204, October.
    18. 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.
    19. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    20. Marco Pagano, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 255-274.
    21. Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, vol. 50(6), pages 1415-1430, November.
    22. Herrera, Helios, 2005. "Sorting in risk-aversion and asset price volatility," Journal of Mathematical Economics, Elsevier, vol. 41(4-5), pages 557-570, August.
    23. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    24. Sanford J. Grossman, 1977. "The Existence of Futures Markets, Noisy Rational Expectations and Informational Externalities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 431-449.
    25. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-955, September.
    26. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    27. 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.
    28. repec:bla:jfinan:v:59:y:2004:i:4:p:1553-1583 is not listed on IDEAS
    29. David Hirshleifer, 1988. "Residual Risk, Trading Costs, and Commodity Futures Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 173-193.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Helios Herrera, 2005. "Sorting in Risk-Aversion and Asset Price Volatility," Levine's Bibliography 172782000000000083, UCLA Department of Economics.
    2. Peress, Joel, 2010. "The tradeoff between risk sharing and information production in financial markets," Journal of Economic Theory, Elsevier, vol. 145(1), pages 124-155, January.
    3. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    4. Calvet, Laurent & Gonzalez-Eiras, Martín & Sodini, Paolo, 2004. "Financial Innovation, Market Participation, and Asset Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(3), pages 431-459, September.
    5. Yannis Bilias & Michael Haliassos, 2004. "The Distribution of Gains from Access to Stocks," CSEF Working Papers 125, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    6. Luigi Guiso & Michael Haliassos & Tullio Jappelli, 2003. "Household stockholding in Europe: where do we stand and where do we go? [‘Limited market participation and volatility of assets prices’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 18(36), pages 123-170.
    7. Kim, Youngsoo & Lee, Bong Soo, 2007. "Limited participation and the closed-end fund discount," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 381-399, February.
    8. García, Diego & Urošević, Branko, 2013. "Noise and aggregation of information in large markets," Journal of Financial Markets, Elsevier, vol. 16(3), pages 526-549.
    9. Helios Herrera, 2001. "Participation Externalities and Asset Price Volatility," Levine's Working Paper Archive 625018000000000242, David K. Levine.
    10. Gabriel Desgranges & Celine Rochon, 2008. "Conformism, Public News and Market Effciency," OFRC Working Papers Series 2008fe16, Oxford Financial Research Centre.
    11. Luigi Guiso & Tullio Jappelli, 2005. "Awareness and Stock Market Participation," Review of Finance, European Finance Association, vol. 9(4), pages 537-567.
    12. Bing Han & Liyan Yang, 2013. "Social Networks, Information Acquisition, and Asset Prices," Management Science, INFORMS, vol. 59(6), pages 1444-1457, June.
    13. Gabriel Desgranges & Céline Rochon, 2013. "Conformism and public news," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(3), pages 1061-1090, April.
    14. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2000. "Money, Interest Rates, and Exchange Rates with Endogenously Segmented Asset Markets," NBER Working Papers 7871, National Bureau of Economic Research, Inc.
    15. Froot, Kenneth A & Scharftstein, David S & Stein, Jeremy C, 1992. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," Journal of Finance, American Finance Association, vol. 47(4), pages 1461-1484, September.
    16. Skreta, Vasiliki & Veldkamp, Laura, 2009. "Ratings shopping and asset complexity: A theory of ratings inflation," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 678-695, July.
    17. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    18. Pavan, Alessandro & Vives, Xavier, 2015. "Information, Coordination, and Market Frictions: An Introduction," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 407-426.
    19. repec:dau:papers:123456789/12877 is not listed on IDEAS
    20. Ardalan, Kavous, 1998. "Financial markets with asymmetric information: An expository review of seminal models," International Review of Economics & Finance, Elsevier, vol. 7(1), pages 23-51.
    21. Huang, Jennifer & Wang, Jiang, 2010. "Market liquidity, asset prices, and welfare," Journal of Financial Economics, Elsevier, vol. 95(1), pages 107-127, January.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cie:wpaper:0206. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Diego Dominguez (email available below). General contact details of provider: https://edirc.repec.org/data/ciitamx.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.