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Bubbles And Multiple-Factor Asset Pricing Models

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  • ROBERT JARROW

    (Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853, Kamakura Corporation, Honolulu 96815, Hawaii)

Abstract

This paper derives a multiple-factor asset pricing model with asset price bubbles in an arbitrage-free, competitive, and frictionless market. As such it generalizes existing asset pricing models, all of which implicitly assume asset price bubbles do not exist. This generalization leads to two new empirical implications. The first is that positive alphas can exist in an arbitrage-free market due to the existence of asset price bubbles. These positive alphas do not represent abnormal profit opportunities. The second is that bubble risk factors can exist with positive risk premiums. The testing of these new empirical implications awaits subsequent research.

Suggested Citation

  • Robert Jarrow, 2016. "Bubbles And Multiple-Factor Asset Pricing Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(01), pages 1-19, February.
    • Handle: RePEc:wsi:ijtafx:v:19:y:2016:i:01:n:s0219024916500072
    DOI: 10.1142/S0219024916500072
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    References listed on IDEAS

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    Cited by:

    1. Kazuhiro Hiraki & George Skiadopoulos, 2018. "The Contribution of Frictions to Expected Returns," Working Papers 874, Queen Mary University of London, School of Economics and Finance.
    2. Liao Zhu & Haoxuan Wu & Martin T. Wells, 2021. "A News-based Machine Learning Model for Adaptive Asset Pricing," Papers 2106.07103, arXiv.org.
    3. Jerome L Kreuser & Didier Sornette, 2017. "Super-Exponential RE Bubble Model with Efficient Crashes," Swiss Finance Institute Research Paper Series 17-33, Swiss Finance Institute.
    4. Robert Jarrow, 2018. "An Equilibrium Capital Asset Pricing Model in Markets with Price Jumps and Price Bubbles," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 1-33, June.
    5. Liao Zhu, 2021. "The Adaptive Multi-Factor Model and the Financial Market," Papers 2107.14410, arXiv.org, revised Aug 2021.

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