Asset price bubbles in markets with transaction costs

Biagini, Francesca and Reitsam, Thomas (2022): Asset price bubbles in markets with transaction costs. In: Frontiers of Mathematical Finance, Vol. 1, No. 3: p. 397

Abstract

We study asset price bubbles in market models with proportional transaction costs λ∈(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+λ)S. We investigate the impact of transaction costs on asset price bubbles and show that our model intrinsically includes the birth of a bubble.

• Item Type: Journal article
• Faculties: Mathematics, Computer Science and Statistics > Mathematics > Workgroup Financial Mathematics
• Subjects: 500 Science > 510 Mathematics
• ISSN: 2769-6715
• Language: English