Asset Price Bubbles in market models with proportional transaction costs

Abstract

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

Tasks

Reproductions