How to Detect an Asset Bubble

32 Pages Posted: 7 Jun 2010 Last revised: 16 Mar 2011

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Younes Kchia

affiliation not provided to SSRN

Philip Protter

Cornell University

Date Written: February 2011

Abstract

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 di erential 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.

Suggested Citation

Jarrow, Robert A. and Kchia, Younes and Protter, Philip, How to Detect an Asset Bubble (February 2011). Johnson School Research Paper Series No. 28-2010. Available at SSRN: https://ssrn.com/abstract=1621728 or http://dx.doi.org/10.2139/ssrn.1621728

Robert A. Jarrow (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Younes Kchia

affiliation not provided to SSRN ( email )

Philip Protter

Cornell University ( email )

Ithaca, NY 14853
United States

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