Asset Price Bubbles in Incomplete Markets

@inproceedings{Jarrow2007AssetPB,
  title={Asset Price Bubbles in Incomplete Markets},
  author={Robert Jarrow and Philip Protter and Kazuhiro Shimbo},
  year={2007}
}
This paper studies asset price bubbles in a continuous time model using the local martingale framework. Providing careful definitions of the asset’s market and fundamental price, we characterize all possible price bubbles in an incomplete market satisfying the ”no free lunch with vanishing risk” and ”no dominance” assumptions. We propose a new theory for bubble birth which involves a nontrivial modification of the classical framework. We show that the two leading models for bubbles as either… CONTINUE READING
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