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.
Liquidity Induced Asset Bubbles via Flows of ELMMs
Mazzon, A;
2018-01-01
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.File | Dimensione | Formato | |
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