Bubbles and Multiple-Factor Asset Pricing Models

18 Pages Posted: 5 Aug 2015 Last revised: 13 Nov 2015

See all articles by Robert A. Jarrow

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: November 12, 2015

Abstract

This paper derives a multiple-factor asset pricing model with asset price bubbles in an arbitrage-free, competitive, and frictionless market. As such it generalizes existing asset pricing models, all of which implicitly assume asset price bubbles do not exist. This generalization leads to two new empirical implications. The first is that positive alphas can exist in an arbitrage-free market due to the existence of asset price bubbles. These positive alphas do not represent abnormal profit opportunities. The second is that bubble risk factors can exist with positive risk premiums. The testing of these new empirical implications awaits subsequent research.

Keywords: beta model, multiple-factor model, price bubbles, arbitrage pricing, stock alpha

JEL Classification: G11, G12

Suggested Citation

Jarrow, Robert A., Bubbles and Multiple-Factor Asset Pricing Models (November 12, 2015). Available at SSRN: https://ssrn.com/abstract=2639374 or http://dx.doi.org/10.2139/ssrn.2639374

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)

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