Strict Local Martingales Via Filtration Enlargement
Electronic version of an article published as [International Journal of Theoretical and Applied Finance, Volume 23, Number 1, 2020, 28 pages] [DOI/10.1142/S0219024920500016] © [copyright World Scientific Publishing Company]
Posted: 1 Feb 2021
Date Written: December 27, 2019
A strict local martingale is a local martingale that is not a martingale. We investigate how such a process might arise from a true martingale as a result of an enlargement of the filtration and a change of measure. We study and implement a particular type of enlargement, initial expansion of filtration, for stochastic volatility models with and without jumps and provide sufficient conditions in each of these cases such that initial expansion can create a strict local martingale. We provide examples of initial enlargement that effect this change.
Keywords: Strict local martingales, filtration expansion, bubbles
JEL Classification: G12, G19
Suggested Citation: Suggested Citation