Detecting Asset Price Bubbles

Abstract

Bubbles aren’t supposed to happen in efficient markets. Yet a couple of recent periods certainly resembled bubbles. The efficient market fallback argument is that these events can be considered to be bubbles only after they have popped. Jarrow discusses two approaches to identify whether a bubble is present before it pops. One is based on economic fundamentals, which makes sense but is hard to apply in practice, and one is based on the statistical properties of the asset price process, which he believes to be more amenable to meaningful analysis.

TOPICS: Derivatives, accounting and ratio analysis