Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/315413 
Year of Publication: 
2024
Citation: 
[Journal:] Review of Derivatives Research [ISSN:] 1573-7144 [Volume:] 27 [Issue:] 1 [Publisher:] Springer US [Place:] New York, NY [Year:] 2024 [Pages:] 85-111
Publisher: 
Springer US, New York, NY
Abstract: 
The martingale theory of bubbles enables testing for asset price bubbles by analyzing option prices. As recently shown by Piiroinen et al. (Asset price bubbles: an option-based indicator, 2018), the SABR model is a strict local martingale when its parameterization implies a positive correlation between stock and option prices. We operationalize this theoretical result and analyze stock price bubbles in 2576 stocks over 26 years. Martingale defect conditions are absorbed quickly by options markets, but identify high proportions in significant and permanent changes in distribution of price returns, option trading activity, short interest in the underlying, and institutional ownership. These results confirm many common assumptions about stock price bubbles. These bubbles are temporally clustered, and tend to occur in periods of positive market development. Martingale defects are rare in market corrections, which indicates that they are a result of overoptimistic speculation.
Subjects: 
Stock price bubbles
Martingale defect
Strict local martingales
SABR model
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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