Limited Market Participation and Volatility of Asset Prices (Revised: 2-92)

Franklin Allen and Douglas Gale ()

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: Traditional theories of asset pricing assume there is complete market participation so all investors participate in all markets. In this case changes in preferences 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 changes in preferences so that an arbitrarily small degree of aggregate uncertainty in preferences can cause a large degree of price volatility. We also show that in addition to this equilibrium with limited participation and volatile asset prices, there may exist a Pareto-preferred equilibrium with complete participation and less volatility.

References: Add references at CitEc
Citations: View citations in EconPapers (2)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fth:pennfi:14-91

Access Statistics for this paper

More papers in Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().