Liquidity induced asset bubbles via flows of ELMMs
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Publication:4579843
Derivative securities (option pricing, hedging, etc.) (91G20) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Martingales with continuous parameter (60G44) Applications of stochastic analysis (to PDEs, etc.) (60H30) Financial applications of other theories (91G80)
Abstract: We consider a constructive model for asset price bubbles, where the market price is endogenously determined by the trading activity on the market and the fundamental price is exogenously given, as in the work of Jarrow, Protter and Roch (2012). To justify from a fundamental point of view, we embed this constructive approach in the martingale theory of bubbles, see Jarrow, Protter and Shimbo (2010) and Biagini, F"ollmer and Nedelcu (2014), by showing the existence of a flow of equivalent martingale measures for , under which equals the expectation of the discounted future cash flow. As an application, we study bubble formation and evolution in a financial network.
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