Liquidity based modeling of asset price bubbles via random matching

Abstract

In this paper we study the evolution of asset price bubbles driven by contagion effects spreading among investors via a random matching mechanism in a discrete-time version of the liquidity based model of [25]. To this scope, we extend the Markov conditionally independent dynamic directed random matching of [13] to a stochastic setting to include stochastic exogenous factors in the model. We derive conditions guaranteeing that the financial market model is arbitrage-free and present some numerical simulation illustrating our approach.