Limited Market Participation and Volatility of Asset Prices (Revision of 14-91) (Reprint 043)

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 a complete market participation, in the sense that all investors participate in all markets. In that case, preferences shocks 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 preference shocks, so that an arbitrarily small degree of aggregate uncertainty about preferences causes a large degree of price volatility. We also show there may exist Pareto-ranked equilibria, where the Pareto-preferred equilibrium is characterized by a different pattern of participation and lower 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:
Working Paper: Limited Market Participation and Volatility of Asset Prices (Revision of 14-91) (Reprint 043)
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:2-92

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 ().