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Analysis of continuous strict local martingales via h-transforms


  • Soumik Pal
  • Philip Protter


We study strict local martingales via h-transforms, a method which first appeared in Delbaen-Schachermayer. We show that strict local martingales arise whenever there is a consistent family of change of measures where the two measures are not equivalent to one another. Several old and new strict local martingales are identified. We treat examples of diffusions with various boundary behavior, size-bias sampling of diffusion paths, and non-colliding diffusions. A multidimensional generalization to conformal strict local martingales is achieved through Kelvin transform. As curious examples of non-standard behavior, we show by various examples that strict local martingales do not behave uniformly when the function (x-K)^+ is applied to them. Implications to the recent literature on financial bubbles are discussed.

Suggested Citation

  • Soumik Pal & Philip Protter, 2007. "Analysis of continuous strict local martingales via h-transforms," Papers 0711.1136,, revised Jun 2010.
  • Handle: RePEc:arx:papers:0711.1136

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    References listed on IDEAS

    1. Robert Fernholz & Ioannis Karatzas & Constantinos Kardaras, 2005. "Diversity and relative arbitrage in equity markets," Finance and Stochastics, Springer, vol. 9(1), pages 1-27, January.
    2. Alexander Cox & David Hobson, 2005. "Local martingales, bubbles and option prices," Finance and Stochastics, Springer, vol. 9(4), pages 477-492, October.
    3. Loewenstein, Mark & Willard, Gregory A., 2000. "Rational Equilibrium Asset-Pricing Bubbles in Continuous Trading Models," Journal of Economic Theory, Elsevier, vol. 91(1), pages 17-58, March.
    4. Robert Fernholz & Ioannis Karatzas, 2005. "Relative arbitrage in volatility-stabilized markets," Annals of Finance, Springer, vol. 1(2), pages 149-177, November.
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    Cited by:

    1. Kreher, Dörte & Nikeghbali, Ashkan, 2015. "A new kind of augmentation of filtrations suitable for a change of probability measure by a strict local martingale," Statistics & Probability Letters, Elsevier, vol. 104(C), pages 94-101.
    2. Cetin, Umut, 2018. "Diffusion transformations, Black-Scholes equation and optimal stopping," LSE Research Online Documents on Economics 87261, London School of Economics and Political Science, LSE Library.
    3. repec:spr:finsto:v:22:y:2018:i:2:d:10.1007_s00780-018-0356-8 is not listed on IDEAS
    4. Kardaras, Constantinos & Kreher, Dörte & Nikeghbali, Ashkan, 2015. "Strict local martingales and bubbles," LSE Research Online Documents on Economics 64967, London School of Economics and Political Science, LSE Library.
    5. Peter Imkeller & Nicolas Perkowski, 2011. "The Existence of Dominating Local Martingale Measures," Papers 1111.3885,, revised Mar 2013.
    6. Ruf, Johannes, 2013. "A new proof for the conditions of Novikov and Kazamaki," Stochastic Processes and their Applications, Elsevier, vol. 123(2), pages 404-421.
    7. David Criens, 2016. "Deterministic Criteria for the Absence and Existence of Arbitrage in Multi-Dimensional Diffusion Markets," Papers 1609.01621,, revised Dec 2017.
    8. repec:wsi:ijtafx:v:21:y:2018:i:01:n:s0219024918500024 is not listed on IDEAS
    9. Francesca Biagini & Jacopo Mancin, 2016. "Robust Financial Bubbles," Papers 1602.05471,
    10. 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.
    11. Jarrow, Robert & Protter, Philip, 2012. "Discrete versus continuous time models: Local martingales and singular processes in asset pricing theory," Finance Research Letters, Elsevier, vol. 9(2), pages 58-62.
    12. Paolo Guasoni & Miklós Rásonyi, 2015. "Fragility of arbitrage and bubbles in local martingale diffusion models," Finance and Stochastics, Springer, vol. 19(2), pages 215-231, April.
    13. Roseline Bilina Falafala & Robert A. Jarrow & Philip Protter, 2016. "Relative asset price bubbles," Annals of Finance, Springer, vol. 12(2), pages 135-160, May.
    14. Peter Imkeller & Nicolas Perkowski, 2015. "The existence of dominating local martingale measures," Finance and Stochastics, Springer, vol. 19(4), pages 685-717, October.
    15. repec:eee:stapro:v:129:y:2017:i:c:p:65-68 is not listed on IDEAS

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