Asset Price Bubbles in market models with proportional transaction costs

We study asset price bubbles in market models with proportional transaction costs \(\lambda\in (0,1)\) 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 te...

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Bibliographic Details
Published in:arXiv.org 2020-12
Main Authors: Biagini, Francesca, Reitsam, Thomas
Format: Article
Language:English
Subjects:
Bubbles
Replication
Online Access:Get full text
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Summary:We study asset price bubbles in market models with proportional transaction costs \(\lambda\in (0,1)\) 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 \((1+\lambda)S\). We investigate the impact of transaction costs on asset price bubbles and show that our model intrinsically includes the birth of a bubble.
ISSN:2331-8422