Testing for Asset Price Bubbles using Options Data

44 Pages Posted: 27 Aug 2020 Last revised: 13 May 2021

See all articles by Nicola Fusari

Nicola Fusari

Johns Hopkins University - Carey Business School

Robert Jarrow

Cornell SC Johnson College of Business

Sujan Lamichhane

Johns Hopkins University - Carey Business School

Date Written: August 10, 2020

Abstract

We present a new approach to identifying asset price bubbles based on options data. Given their forward-looking nature, options are ideal instruments with which to investigate market expectations about the future evolution of asset prices, which are key to understanding price bubbles. By exploiting the differential pricing between put and call options, we can detect and quantify bubbles in the prices of underlying asset. We apply our methodology to two stock market indexes, the S&P 500 and the Nasdaq-100, and two technology stocks, Amazon and Facebook, over the 2014-2018 sample period. We find that, while indexes exhibit rare and modest bubbles, Amazon and Facebook show more frequent and much larger bubbles. Since our approach can be implemented in real time, it is useful to both policy-makers and investors. As an illustration, our methodology applied to GameStop identifies a significant bubble between December 2020 and January 2021.

Keywords: Asset Price Bubbles, Option Pricing, Stochastic Volatility, Martingales, Local Martingales

JEL Classification: C51, C52, G12, G13

Suggested Citation

Fusari, Nicola and Jarrow, Robert and Lamichhane, Sujan, Testing for Asset Price Bubbles using Options Data (August 10, 2020). Johns Hopkins Carey Business School Research Paper No. 20-12, Available at SSRN: https://ssrn.com/abstract=3670999 or http://dx.doi.org/10.2139/ssrn.3670999

Nicola Fusari (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Robert Jarrow

Cornell SC Johnson College of Business

Ithaca, NY 14850
United States

Sujan Lamichhane

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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