Strict local martingales and bubbles

Constantinos Kardaras, Dörte Kreher and Ashkan Nikeghbali

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper deals with asset price bubbles modeled by strict local martingales. With any strict local martingale, one can associate a new measure, which is studied in detail in the first part of the paper. In the second part, we determine the “default term” apparent in risk-neutral option prices if the underlying stock exhibits a bubble modeled by a strict local martingale. Results for certain path dependent options and last passage time formulas are given.

Keywords: Strict local martingales; bubbles (search for similar items in EconPapers)
JEL-codes: C1 (search for similar items in EconPapers)
Date: 2015-08-01
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Citations: View citations in EconPapers (15)

Published in Annals of Applied Probability, 1, August, 2015, 25(4), pp. 1827-1867. ISSN: 1050-5164

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:64967

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