 Detecting money market bubblesJan Baldeaux, Katja Ignatieva and Eckhard Platen () Journal of Banking & Finance, 2018, vol. 87, issue C, 369-379 Abstract: The existence of a self-financing trading strategy that replicates the money market account at a fixed future date at a lower cost than the current value of this account constitutes a money market bubble (MMB). Understanding whether a market exhibits an MMB is crucial, in particular, for derivative pricing. An MMB precludes the existence of a risk-neutral probability measure. The benchmark approach allows to study MMBs and is formulated under the real world probability measure. It does not require the existence of a risk neutral probability measure. Using a range of well-known stochastic volatility models, we study the existence of an MMB in the US economy, and find that the US market exhibits an MMB for all models considered that allow it. This suggests that for derivative pricing and hedging care should be taken when making assumptions pertaining to the existence of a risk-neutral probability measure. Less expensive portfolios are likely to exist for a wide range of long-term derivatives, as typical for pensions. Keywords: Money market bubbles; Strict local martingales; Markov chain Monte Carlo; Stochastic volatility models; Benchmark approach (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:87:y:2018:i:c:p:369-379 DOI: 10.1016/j.jbankfin.2017.10.017 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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