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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
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    File URL: http://dx.doi.org/10.1146/annurev-financial-030215-035912
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Johannes Ruf & Wolfgang Runggaldier, 2013. "A Systematic Approach to Constructing Market Models With Arbitrage," Papers 1309.1988, arXiv.org, revised Dec 2013.
    2. Erhan Bayraktar & Constantinos Kardaras & Hao Xing, 2012. "Strict local martingale deflators and valuing American call-type options," Finance and Stochastics, Springer, vol. 16(2), pages 275-291, April.
    3. Winslow Strong & Jean-Pierre Fouque, 2011. "Diversity and arbitrage in a regulatory breakup model," Annals of Finance, Springer, vol. 7(3), pages 349-374, August.
    4. Claudio Fontana & Wolfgang J. Runggaldier, 2012. "Diffusion-based models for financial markets without martingale measures," Papers 1209.4449, arXiv.org, revised Feb 2013.
    5. Robert Jarrow & Younes Kchia & Philip Protter, 2011. "Is there a bubble in LinkedIn's stock price?," Papers 1105.5717, arXiv.org.
    6. Hüsler, A. & Sornette, D. & Hommes, C.H., 2013. "Super-exponential bubbles in lab experiments: Evidence for anchoring over-optimistic expectations on price," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 304-316.
    7. Robert Jarrow & Philip Protter, 2011. "Foreign currency bubbles," Review of Derivatives Research, Springer, vol. 14(1), pages 67-83, April.
    8. Erhan Bayraktar & Hasanjan Sayit, 2010. "No arbitrage conditions for simple trading strategies," Annals of Finance, Springer, vol. 6(1), pages 147-156, January.
    9. Erhan Bayraktar & Constantinos Kardaras & Hao Xing, 2010. "Valuation equations for stochastic volatility models," Papers 1004.3299, arXiv.org, revised Dec 2011.
    10. Robert Jarrow, 2010. "Convenience yields," Review of Derivatives Research, Springer, vol. 13(1), pages 25-43, April.
    11. Peter Imkeller & Nicolas Perkowski, 2011. "The Existence of Dominating Local Martingale Measures," Papers 1111.3885, arXiv.org, revised Mar 2013.
    12. Alessandro Fiori Maccioni, 2011. "Endogenous Bubbles in Derivatives Markets: The Risk Neutral Valuation Paradox," Papers 1106.5274, arXiv.org, revised Sep 2011.
    13. Ke Du & Eckhard Platen, 2016. "Benchmarked Risk Minimization," Mathematical Finance, Wiley Blackwell, vol. 26(3), pages 617-637, July.
    14. Sergio Pulido, 2010. "The fundamental theorem of asset pricing, the hedging problem and maximal claims in financial markets with short sales prohibitions," Papers 1012.3102, arXiv.org, revised Jan 2014.
    15. Aleksandar Mijatović, 2010. "Local time and the pricing of time-dependent barrier options," Finance and Stochastics, Springer, vol. 14(1), pages 13-48, January.
    16. Johannes Ruf, 2012. "Negative Call Prices," Papers 1204.1903, arXiv.org, revised Jan 2013.
    17. Jean Jacod & Philip Protter, 2010. "Risk-neutral compatibility with option prices," Finance and Stochastics, Springer, vol. 14(2), pages 285-315, April.
    18. Ke Du & Eckhard Platen, 2011. "Three-Benchmarked Risk Minimization for Jump Diffusion Markets," Research Paper Series 296, Quantitative Finance Research Centre, University of Technology, Sydney.
    19. A. Fiori Maccioni, 2011. "The risk neutral valuation paradox," Working Paper CRENoS 201112, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.

    More about this item

    Keywords

    asset price bubbles; derivatives; equilibrium; local martingales; martingales; no arbitrage; no dominance;

    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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