Stock market participation and endogenous boom-bust dynamics

- We study the impact of stock market participation on the dynamics of stock markets.
- Stock market participation depends on the market's price trend and on its mispricing.
- Increasing stock market participation may produce endogenous boom-bust dynamics.
- The predictions of our model are in line with empirical and experimental evidence.

We develop a model in which stock market participation depends on current market movements and on the fundamental state of the market. Our model explains empirical and experimental evidence according to which increasing (decreasing) stock market participation amplifies bubbles (crashes).