Philip Protter (Cornell University)
Asset pricing theory is often treated as though the price process under the risk neutral measure is a martingale. This is misleading, since when the price process is a strict local martingale, it may correspond to a financial bubble. We will present the recently developed theory of financial bubbles, based on the work of R. Jarrow, K. Shimbo, and this author. We will also relate it to a new type of bubble which we call a liquidity bubble, which can arise strictly due to issues of liquidity, and is independent of the other type of bubble.
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