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Asset Price Bubbles

Author

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  • Robert A. Jarrow

    (Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853; and Kamakura Corporation, Honolulu, Hawaii 96815)

Abstract

This article reviews the theoretical literature on asset price bubbles, with an emphasis on the martingale theory of bubbles. The key questions studied are as follows: First, under what conditions can asset price bubbles exist in an economy? Second, if bubbles exist, what are the implications for the pricing of derivatives on the bubble-laden asset? Third, if bubbles can exist, how can they be empirically determined? Answers are provided for three frictionless and competitive economies with increasingly restrictive structures. The least restrictive economy just assumes no arbitrage. The next satisfies no arbitrage and no dominance. The third assumes the existence of an equilibrium.

Suggested Citation

  • Robert A. Jarrow, 2015. "Asset Price Bubbles," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 201-218, December.
    • Handle: RePEc:anr:refeco:v:7:y:2015:p:201-218
    DOI: 10.1146/annurev-financial-030215-035912
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    More about this item

    Keywords

    asset price bubbles; derivatives; equilibrium; local martingales; martingales; no arbitrage; no dominance;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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