Relative asset price bubbles

Roseline Bilina Falafala, Robert Jarrow () and Philip Protter ()
Additional contact information
Roseline Bilina Falafala: Goldman Sachs
Philip Protter: Columbia University

Annals of Finance, 2016, vol. 12, issue 2, No 1, 135-160

Abstract: Abstract In models of financial bubbles, the price of a stock is typically unbounded, and this plays a fundamental role in the analysis of finite horizon local martingale bubbles. It would seem that price bubbles do not apply to a priori bounded risky asset prices, such as bond prices. To avoid this limitation, to characterize, and to identify bond price mispricings consistent with an absence of arbitrage, we develop the concept of a relative asset price bubble. This notion uses a risky asset’s price as the numéraire instead of the money market account’s value. This change of numéraire generates some interesting mathematical complexities because many important numéraires, including risky bonds, can vanish with positive probability over the model’s horizon.

Keywords: Bubble; No Free Lunch with Vanishing Risk; Arbitrage; Risk neutral measure; Girsanov’s theorem; Bond bubbles; Change of numéraire (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10436-016-0274-8 Abstract (text/html)
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:kap:annfin:v:12:y:2016:i:2:d:10.1007_s10436-016-0274-8

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10436/PS2

DOI: 10.1007/s10436-016-0274-8

Access Statistics for this article

Annals of Finance is currently edited by Anne Villamil

More articles in Annals of Finance from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().