Market Participation, Information and Volatility

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.