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...

In models of financial bubbles, the price of a stock is a priori typically unbounded, and this plays a fundamental role in the analysis of finite horizon local martingale bubbles. It would seem that price bubbles do not apply to bounded risky asset prices, such as bond prices. To avoid this...

This paper presents an arbitrage-free valuation model for a credit risky security where credit risk coexists and interacts with an asset price bubble and liquidity risk (or liquidity costs). As an illustration, this model is applied to determine the fair rate for microfinance loans

This paper provides an invariance theorem that facilitates testing for the existence of an asset price bubble in a market where the price evolves as a Markov diffusion process. The test involves only the properties of the price process' quadratic variation under the statistical probability. It...

After the 2007 credit crisis, nancial bubbles have once again emerged as a topic of current concern. An open problem is to determine in real time whether or not a given asset's price process exhibits a bubble. Due to recent progress in the characterization of asset price bubbles using the...