The Formation of Financial Bubbles in Defaultable Markets

  title={The Formation of Financial Bubbles in Defaultable Markets},
  author={Francesca Biagini and Sorin Nedelcu},
  journal={SIAM J. Financial Math.},
In this paper we study the formation of financial bubbles in the valuation of defaultable claims in a reduced-form setting. The birth of a bubble is caused by the impact of trading activity of investors, who consider the claim to be a safe investment under some circumstances. We also show how microeconomic interactions may, at an aggregate level, determine a shift in the martingale measure. In this way we establish a connection between our approach and the martingale theory of bubbles; see [F… 
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