Shifting Martingale Measures and the Birth of a Bubble as a Submartingale

in Finance and Stochastics (2014), 18(2), 297-326

In an incomplete financial market model, we study a flow in the space of equivalent martingale measures and the corresponding shifting perception of the fundamental value of a given asset. This allows us ... [more ▼]

In an incomplete financial market model, we study a flow in the space of equivalent martingale measures and the corresponding shifting perception of the fundamental value of a given asset. This allows us to capture the birth of a perceived bubble and to describe it as an initial submartingale which then turns into a supermartingale before it falls back to its initial value zero. [less ▲]