Shifting martingale measures and the birth of a bubble as a submartingale (Q468413): Difference between revisions

The authors of this paper are interested in the formation and perception of bubbles in financial markets. In particular, they construct and study a flow in the space of martingale measures and use it to describe the ``birth'' of a financial bubble. They consider two martingale measures \(Q\) and \(R\), where the wealth process of a financial asset is a uniformly integrable martingale under \(Q\) but not under \(R\). Then, the flow moves from \(Q\) and \(R\) via convex combinations and this allows one to observe the ``birth'' of a financial bubble, when the wealth process stops being a uniformly integrable martingale. The construction and behavior of this flow are illustrated in two examples.