Asset price bubbles in markets with transaction costs

DOI10.3934/FMF.2022002MaRDI QIDQ2085833zbMATH OpenOpenAlexFDO

Authors Francesca Biagini, Thomas Reitsam

Publication date 19 October 2022

Published in Frontiers of Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1911.10149

zbMATH Keywords

consistent price systemsfinancial bubblesfundamental valuesuper-replicationtransaction costs

Mathematics Subject Classification ID

Martingales with continuous parameter (60G44) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: We study asset price bubbles in market models with proportional transaction costs $lambdain(0,1)$ and finite time horizon $T$ in the setting of [49]. By following [28], we define the fundamental value $F$ of a risky asset $S$ as the price of a super-replicating portfolio for a position terminating in one unit of the asset and zero cash. We then obtain a dual representation for the fundamental value by using the super-replication theorem of [50]. We say that an asset price has a bubble if its fundamental value differs from the ask-price $(1+lambda)S$. We investigate the impact of transaction costs on asset price bubbles and show that our model intrinsically includes the birth of a bubble.

Recommendations

• Asymptotic asset pricing and bubbles
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• Bubbles in assets with finite life
• Financial asset price bubbles under model uncertainty

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Cited in

(6)

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• Asymptotic asset pricing and bubbles
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• Bubbles in assets with finite life
• TRANSACTION SERVICES AND ASSET-PRICE BUBBLES
• Asset price bubbles, wealth preserving, dominating, and replicating trading strategies

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