Asset Price Bubbles, Wealth Preserving, Dominating and Replicating Trading Strategies

Robert Jarrow () and Yuxuan Liu

Chapter 14 in Peter Carr Gedenkschrift:Research Advances in Mathematical Finance, 2023, pp 475-510 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter studies an arbitrage-free, competitive and frictionless market with trading in a single risky asset and money market account, where the risky asset exhibits a price bubble. We analyze two sets of self-financing and admissible trading strategies in this market. The first are simple trading strategies, and the second are trading strategies that replicate or super-replicate the risky asset’s payoffs at the model’s horizon. We show that, in both sets, there exist wealth preserving trading strategies, i.e., trading strategies whose initial value equals the present value of their future cash flows. And, in the second set, we show that there are wealth preserving replicating trading strategies that dominate buying and holding the risky asset. The practical applications of these insights are discussed.

Keywords: Mathematical Finance; Quantitative Finance; Option Pricing; Derivatives; No Arbitrage; Asset Price Bubbles; Asset Pricing; Equilibrium; Volatility; Diffusion Processes; Jump Processes; Stochastic Integration; Trading Strategies; Portfolio Theory; Optimization; Securities; Bonds; Commodities; Futures (search for similar items in EconPapers)
JEL-codes: C02 C6 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789811280306_0014 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789811280306_0014 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789811280306_0014

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().