Constantinos Kardaras, Dörte Kreher, Ashkan Nikeghbali
Published 2011-08-21, updated 2015-06-19Version 3
This paper deals with asset price bubbles modeled by strict local martingales. With any strict local martingale, one can associate a new measure, which is studied in detail in the first part of the paper. In the second part, we determine the "default term" apparent in risk-neutral option prices if the underlying stock exhibits a bubble modeled by a strict local martingale. Results for certain path dependent options and last passage time formulas are given.
Comments: Published at http://dx.doi.org/10.1214/14-AAP1037 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org)
Journal: Annals of Applied Probability 2015, Vol. 25, No. 4, 1827-1867
Strict Local Martingales via Filtration Enlargement
Note on the First Part of Borel-Cantelli Lemma
Filtration shrinkage, strict local martingales and the Föllmer measure
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