STRONG BUBBLES AND STRICT LOCAL MARTINGALES

Martin Herdegen () and Martin Schweizer
Additional contact information
Martin Herdegen: ETH Zürich, Mathematik, HG J44, Rämistrasse 101, CH–8092 Zürich, Switzerland
Martin Schweizer: ETH Zürich, Mathematik, HG G51.2, Rämistrasse 101, CH–8092 Zürich, Switzerland3Swiss Finance Institute, Walchestrasse 9, CH–8006 Zürich, Switzerland

International Journal of Theoretical and Applied Finance (IJTAF), 2016, vol. 19, issue 04, 1-44

Abstract: In a numéraire-independent framework, we study a financial market with N assets which are all treated in a symmetric way. We define the fundamental value ∗S of an asset S as its super-replication price and say that the market has a strong bubble if ∗S and S deviate from each other. None of these concepts needs any mention of martingales. Our main result then shows that under a weak absence-of-arbitrage assumption (basically NUPBR), a market has a strong bubble if and only if in all numéraire s for which there is an equivalent local martingale measure (ELMM), asset prices are strict local martingales under all possible ELMMs. We show by an example that our bubble concept lies strictly between the existing notions from the literature. We also give an example where asset prices are strict local martingales under one ELMM, but true martingales under another, and we show how our approach can lead naturally to endogenous bubble birth.

Keywords: Financial bubble; incomplete financial market; fundamental value; super-replication; strict local martingale; numéraire; viability; efficiency; no dominance (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024916500229
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:19:y:2016:i:04:n:s0219024916500229

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024916500229

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().