Asset Price Bubbles in market models with proportional transaction costs

2019/11/22 by Francesca Biagini, Biagini, Francesca, Thomas Reitsam +1
Economics, Econometrics and Finance · #60G44 #91B70 #91G99 #Economic theories and models #FOS: Economics and business #Financial Markets and Investment Strategies #Mathematical Finance (q-fin.MF) #Stochastic processes and financial applications

paper · pdf · doi:10.48550/arxiv.1911.10149

openalex publication_date 2019/11/22 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

We study asset price bubbles in market models with proportional transaction costs λ∈ (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+λ)S. We investigate the impact of transaction costs on asset price bubbles and show that our model intrinsically includes the birth of a bubble.

Citations

• Admissible Trading Strategies under Transaction Costs

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