This paper shows that high frequency trading may play a dysfunctional role in financial markets. Contrary to arbitrageurs who make financial markets more efficient by taking advantage of and thereby eliminating mispricings, high frequency traders can create a mispricing that they unknowingly...

We provide a new liquidity-based model for financial asset price bubbles that explains bubble formation and bubble bursting. The martingale approach to modeling price bubbles assumes that the asset's market price process is exogenous and the fundamental price, the expected future cash flows...

This paper extends and refines the Jarrow et al. (2006, 2008) arbitrage free pricing theory for bubbles to characterize forward and futures prices. Some new insights are obtained in this regard. In particular, we: (i) provide a canonical process for asset price bubbles suitable for empirical...

A traditional model for financial asset prices is that of a solution of a stochastic differential equation, driven by Brownian motion and Lebesgue measure; that is, a standard diffusion. The classic Black-Scholes model is a special case of this rubric. In some situations, however, such a model is...

A parameterized family of financial market models is presented. These models have jumps intrinsic to the price processes yet have strict completeness, equivalent martingale measures, and no arbitrage. For each value of the parameter $\beta (-2\leq\beta 0)$ the model is just as rich as the...

A strict local martingale is a local martingale which is not a martingale. There are few explicit examples of “naturally occurring” strict local martingales with jumps available in the literature. The purpose of this paper is to provide such examples, and to illustrate how they might arise...

This paper uses a conditional law of large numbers and a conditional central limit theorem to provide simplified asymptotic valuation formulas for credit derivatives on baskets, including synthetic and cash-flow CDOs. In particular, approximate pricing procedures are provided for synthetic and...