Citation

Discussion Paper Details

Please find the details for DP146 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Endogenous Market Thinness and Stock Price Volatility

Author(s): Marco Pagano

Publication Date: December 1986

Keyword(s): Stock Market, Stock Prices, Thin Financial Markets, Transaction Costs and Volatility

Programme Area(s): Applied Macroeconomics and International Macroeconomics

Abstract: 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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=146

Bibliographic Reference

Pagano, M. 1986. 'Endogenous Market Thinness and Stock Price Volatility'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=146