Liquidity Induced Asset Bubbles via Flows of ELMMs

DOI10.1137/16M1107097zbMATH Open1410.91437arXiv1611.01440OpenAlexW2551892736WikidataQ129630475 ScholiaQ129630475MaRDI QIDQ4579843FDOQ4579843

Francesca Biagini, Andrea Mazzon, Thilo Meyer-Brandis

Publication date: 10 August 2018

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: We consider a constructive model for asset price bubbles, where the market price $W$ is endogenously determined by the trading activity on the market and the fundamental price $W^F$ is exogenously given, as in the work of Jarrow, Protter and Roch (2012). To justify $W^F$ 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 $W$, under which $W^F$ equals the expectation of the discounted future cash flow. As an application, we study bubble formation and evolution in a financial network.

Full work available at URL: https://arxiv.org/abs/1611.01440

zbMATH Keywords

bubblesfinancial networksequivalent martingale measuresliquidity-based model

Mathematics Subject Classification ID

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)

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Cited In (5)

• Financial Asset Bubbles in Banking Networks
• Liquidity Based Modeling of Asset Price Bubbles via Random Matching
• Detecting asset price bubbles using deep learning
• Bubbly Liquidity
• Asset price bubbles in markets with transaction costs

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