Liquidity Induced Asset Bubbles via Flows of ELMMs

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 justif...

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Bibliographic Details
Published in:SIAM journal on financial mathematics 2018-01, Vol.9 (2), p.800-834
Main Authors: Biagini, Francesca, Mazzon, Andrea, Meyer-Brandis, Thilo
Format: Article
Language:English
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Summary: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 $W^F$ 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. Föllmer, 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.
ISSN:1945-497X
1945-497X
DOI:10.1137/16M1107097