Liquidity Induced Asset Bubbles via Flows of ELMMs

Biagini, Francesca; Mazzon, Andrea; Meyer-Brandis, Thilo (2018): Liquidity Induced Asset Bubbles via Flows of ELMMs. In: Siam Journal on Financial Mathematics, Vol. 9, No. 2: pp. 800-834

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 [R. Jarrow, P. Protter, and A. Roch, Quant. Finance, 12 (2012), pp. 1339-1349]. 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. 145-185] and [F. Biagini, H. Follmer, and S. Nedelcu, Finance Stoch., 18 (2014), pp. 297-326]) 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.

• Item Type: Journal article
• Faculties: Mathematics, Computer Science and Statistics > Mathematics
• Subjects: 500 Science > 510 Mathematics
• ISSN: 1945-497X
• Language: English