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arXiv · 1108.4177

Strict local martingales and bubbles

Constantinos Kardaras·Dörte Kreher·Ashkan Nikeghbali
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Abstract

This paper deals with asset price bubbles modeled by strict local martingales. With any strict local martingale, one can associate a new measure, which is studied in detail in the first part of the paper. In the second part, we determine the "default term" apparent in risk-neutral option prices if the underlying stock exhibits a bubble modeled by a strict local martingale. Results for certain path dependent options and last passage time formulas are given.

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Constantinos Kardaras, Dörte Kreher, Ashkan Nikeghbali. 2015-06-19. Strict local martingales and bubbles. https://doi.org/10.1214/14-aap1037

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