Bubbles as violations of efficient time-scales

Hyun-U Sohn () and Didier Sornette
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Hyun-U Sohn: ETH Zurich
Didier Sornette: ETH Zurich

No 65, Working Papers Series from Institute for New Economic Thinking

Abstract: It is commonly overlooked that the concept of market efficiency embowers a time-dimension. Illustrating with an example from the class of persistent random walks, we show that a price process can be a martingale on one time-scale but inefficient on another. This means that just as market efficiency can only be defined relative to an information set, it also depends on a time scale. We use this hitherto neglected aspect to propose a new definition of bubbles that does not rely on `fundamental value`: A bubble is a violation of the efficient time-scale in that the market starts to `need longer` to reflect the original information set. That is, just as excess volatility is a violation of market efficiency with respect to its filtration, bubbles are a violation of market efficiency with respect to its time-scale.

Keywords: Bubbles; Efficient markets; Martingales; Persistent random walks; Methodology; Market microstructure (search for similar items in EconPapers)
JEL-codes: B26 B41 D53 D84 E44 G12 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2017-09
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:65

DOI: 10.2139/ssrn.3081563

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