Local martingales, bubbles and option prices
AbstractIn this article we are interested in option pricing in markets with bubbles. A bubble is defined to be a price process which, when discounted, is a local martingale under the risk-neutral measure but not a martingale. We give examples of bubbles both where volatility increases with the price level, and where the bubble is the result of a feedback mechanism. In a market with a bubble many standard results from the folklore become false. Put-call parity fails, the price of an American call exceeds that of a European call and call prices are no longer increasing in maturity (for a fixed strike). We show how these results must be modified in the presence of a bubble. It turns out that the option value depends critically on the definition of admissible strategy, and that the standard mathematical definition may not be consistent with the definitions used for trading. Copyright Springer-Verlag Berlin/Heidelberg 2005
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Springer in its journal Finance and Stochastics.
Volume (Year): 9 (2005)
Issue (Month): 4 (October)
Contact details of provider:
Web page: http://www.springerlink.com/content/101164/
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.