Starting with the economic literature, we will
review the most common models explaining the appearance of bubbles
in asset prices. These are market equilibrium models where some
kind of restriction (say short selling constraints) limit the
ability of arbitrageurs to profit from and eliminate bubbles. We
then move to the characterization of bubbles in the mathematical
finance literature, based on the notion of NFLVR
(no-free-lunch-with-vanishing risk) and using the concepts of
strict local martingales and Merton's no-dominance. We conclude by
describing some of the statistical methods that have been proposed
to detect the existence of a bubble for an asset and its
Schedule and References
- Lecture 1 (15/10/2010): Rational bubbles.
- Bubbles, rational expectations,
and financial markets
, O. Blanchard and M.W. Watson, in Crises in the Economic and
Lexington Books (1982).
- The Theory of Rational Bubbles in
, B. T. Diba and H. I. Grossman, The Economic
Journal, Vol. 98, No. 392, pp. 746-754 (1988).
- On the Possibility of Speculation under
, J.Tirole, Econometrica, Vol. 50,
No. 5, pp. 1163-1181(1982).
- Asset Bubbles and Overlapping Generations
J. Tirole, Econometrica, Vol. 53, No. 6, pp. 1499-1528 (1985).
- Lecture 2 (22/10/2010): Market inefficiencies.
- Stock prices and social dynamics
, R. J.
Shiller, Cowles Foundation Discussion Papers, No. 719R (1984).
- Noise Trader Risk in
, J. B. DeLong, A. Shleifer, L.H.
Summers and R. J. Waldmann, The Journal of Political Economy, Vol.
98, No. 4, pp. pp. 703-738 (1990).
- The Limits of Arbitrage
Shleifer and R. W. Vishny, The Journal of Finance, Vol. 52, No. 1,
pp. 35-55 (1997).
- Lecture 3 (05/11/2010): Financial intermediation,
- Bubbles and Crises
, F. Allen and D.
Gale, The Economic Journal, Vol. 110, No. 460, pp. 236-255 (2000).
- Speculative Investor Behavior in a
Stock Market with Heterogeneous Expectations
, J. M. Harrison
and D. M. Kreps, The Quarterly Journal of Economics, Vol. 92,
No.2, pp. 323-336 (1978).
- Overconfidence and Speculative
, J. A. Scheinkman and W. Xiong, The Journal of
Political Economy, Vol. 111, No. 6, pp. 1183-1219 (2003).
- Lecture 4 (19/11/2010): Strict local martingales,
- Asset Price Bubbles in Complete
, R. A. Jarrow, P. Protter, and K. Shimbo, in Advances in Mathematical Finance.
- Asset Price Bubbles in
, R. A. Jarrow, P. Protter, and K. Shimbo,
Mathematical Finance, Vol 20, No. 2, pp. 145-185 (2010).
- Bubbles and Fads in Asset Prices
Camerer, Journal of Economic Surveys, Vol 3, No. 1, pp. 3-41
- Do Stock Prices Move Too Much to be
Justified by Subsequent Changes in Dividends?
, R. J.
Shiller, American Economic Review, Vol 71, No. 3, 421-436 (1981).
, P. Garber, Journal of
Political Economy, Vol 97, No. 3, pp. 535-560 (1989).
- Famous First Bubbles
, P. Garber, Journal
of Economic Perspectives, Vol 4, No. 2, pp. 35-54 (1990).
- The stock market bubble of 1929:
evidence from clsoed-end mutual funds
, J. B. De Long and A.
Shleifer, The Journal of Economic History, Vol 51, No. 3, 657-700