We study asset price bubbles in market models with proportional transaction costs $lambdain (0,1)$ and finite time horizon $T$ in the setting of [48]. By following [27], 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 [49]. 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.
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