How to Detect an Asset Bubble
Robert A. Jarrow
Cornell University - Samuel Curtis Johnson Graduate School of Management
affiliation not provided to SSRN
Johnson School Research Paper Series No. 28-2010
After the 2007 credit crisis, nancial bubbles have once again emerged as a topic of current concern. An open problem is to determine in real time whether or not a given asset's price process exhibits a bubble. Due to recent progress in the characterization of asset price bubbles using the arbitrage-free martingale pricing technology, we are able to propose a new methodology for answering this question based on the asset's price volatility. We limit ourselves to the special case of a risky asset's price being modeled by a Brownian driven stochastic dierential equation. Such models are ubiquitous both in theory and in practice. Our methods use sophisticated volatility estimation techniques combined with the method of reproducing kernel Hilbert spaces. We illustrate these techniques using several stocks from the alleged internet dot-com episode of 1998 - 2001, where price bubbles were widely thought to have existed. Our results support these beliefs.
Number of Pages in PDF File: 32
Date posted: June 7, 2010 ; Last revised: March 16, 2011
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