FORWARD AND FUTURES PRICES WITH BUBBLES

Robert Jarrow () and Philip Protter ()
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Philip Protter: School of Operations Research, Cornell University, Ithaca, NY 14853-3801, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 07, 901-924

Abstract: This paper extends and refines the Jarrow et al. (2006, 2008) arbitrage free pricing theory for bubbles to characterize forward and futures prices. Some new insights are obtained in this regard. In particular, we: (i) provide a canonical process for asset price bubbles suitable for empirical estimation, (ii) discuss new methods to test empirically for asset price bubbles using both spot prices and call/put option prices on the spot commodity, (iii) show that futures prices can have bubbles independent of the underlying asset's price bubble, (iv) relate forward and futures prices under bubbles, and (v) relate price options on futures with asset price bubbles.

Keywords: Futures; forwards; speculative bubbles; stochastic interest rates; local martingale; inverse Bessel process (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (11)

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DOI: 10.1142/S0219024909005518

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