IDEAS home Printed from https://ideas.repec.org/p/dar/wpaper/154373.html
   My bibliography  Save this paper

Martingale defects in the volatility surface and bubble conditions in the underlying

Author

Listed:
  • Stahl, Philip
  • Blauth, Jérôme

Abstract

The martingale theory of bubbles enables testing for asset price bubbles by analyzing option prices. As recently shown by Piiroinen et al. (Asset price bubbles: an option-based indicator, 2018), the SABR model is a strict local martingale when its parameterization implies a positive correlation between stock and option prices. We operationalize this theoretical result and analyze stock price bubbles in 2576 stocks over 26 years. Martingale defect conditions are absorbed quickly by options markets, but identify high proportions in significant and permanent changes in distribution of price returns, option trading activity, short interest in the underlying, and institutional ownership. These results confirm many common assumptions about stock price bubbles. These bubbles are temporally clustered, and tend to occur in periods of positive market development. Martingale defects are rare in market corrections, which indicates that they are a result of overoptimistic speculation.

Suggested Citation

  • Stahl, Philip & Blauth, Jérôme, 2024. "Martingale defects in the volatility surface and bubble conditions in the underlying," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 154373, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:154373
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/154373/
    as

    Download full text from publisher

    File URL: https://tuprints.ulb.tu-darmstadt.de/29147
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dar:wpaper:154373. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dekanatssekretariat (email available below). General contact details of provider: https://edirc.repec.org/data/ivthdde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.