Participation Externalities and Asset Price Volatility

I analyze how an exogenous cost of entry in a risky asset market a®ects two endogenous variables: the degree of market participation and the price volatility. I show that di®erent entry costs generate different participation equilibria and multiplicity of equilibria arises for some range of entry costs, but the new market entrants are always more risk-averse than the rest of the participants. Every participation equilibrium is associated with a certain volatility of the price of the asset. Most importantly, I show that increased market participation leads to increased asset price volatility, if the new entrants are su±ciently more risk-averse than the old participants. This is supported by empirical evidence. (JEL: G12, D40, C70)