Asset Price Bubbles in market models with proportional transaction costs

Francesca Biagini and Thomas Reitsam

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Abstract: 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.

Date: 2019-11, Revised 2020-12
New Economics Papers: this item is included in nep-fmk and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1911.10149

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