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Forward And Futures Prices With Bubbles

Listed author(s):

    (Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853, USA; Kamakura Corporation, USA)



    (School of Operations Research, Cornell University, Ithaca, NY 14853-3801, USA)

This paper extends and refines the Jarrow et al. (2006, 2008) arbitrage free pricing theory for bubbles to characterize forward and futures prices. Some new insights are obtained in this regard. In particular, we: (i) provide a canonical process for asset price bubbles suitable for empirical estimation, (ii) discuss new methods to test empirically for asset price bubbles using both spot prices and call/put option prices on the spot commodity, (iii) show that futures prices can have bubbles independent of the underlying asset's price bubble, (iv) relate forward and futures prices under bubbles, and (v) relate price options on futures with asset price bubbles.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 12 (2009)
Issue (Month): 07 ()
Pages: 901-924

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Handle: RePEc:wsi:ijtafx:v:12:y:2009:i:07:p:901-924
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