MARKET PARTICIPATION AND SHARE PRICES

Share prices are analyzed in an overlapping generations model in which the generational size is random. This models stochastic fluctuations of market participants and can explain noninformational volatility of share prices. There exists a (stochastic) stationary equilibrium, whic h may be nonunique. In equilibrium, (a) the share price increases and (b) expected utility decreases with the generational size. A decline o f this size below a critical level induces a crash: the stock price fa lls substantially, shares are undervalued, and investors' demand is re stricted by illiquidity. Further, the model predicts the empirically o bserved positive correlation between volume of trade and absolute pric e changes.