Biagini, Francesca; Mazzon, Andrea; MeyerBrandis, Thilo
(2018):
Liquidity Induced Asset Bubbles via Flows of ELMMs.
In: Siam Journal on Financial Mathematics, Vol. 9, No. 2: pp. 800834

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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 WF is exogenously given, as in [R. Jarrow, P. Protter, and A. Roch, Quant. Finance, 12 (2012), pp. 13391349]. To justify WF from a fundamental point of view, we embed this constructive approach in the martingale theory of bubbles (see [R. Jarrow, P. Protter, and K. Shimbo, Math. Finance, 20 (2010), pp. 145185] and [F. Biagini, H. Follmer, and S. Nedelcu, Finance Stoch., 18 (2014), pp. 297326]) by showing the existence of a flow of equivalent martingale measures for W, under which WF equals the expectation of the discounted future cash flow. As an application, we study bubble formation and evolution in a financial network.