A1686
Title: A study on asset price bubble dynamics: explosive trend or quadratic variation?
Authors: Simon Kwok - University of Sydney (Australia) [presenting]
Robert Jarrow - Cornell University (United States)
Abstract: The purpose is to posit that when an asset exhibits a bubble, the time series of its prices can explode with positive probability if a quadratic variation (QV) risk premium is large enough. This QV channel for bubble explosion is new to the literature. Based on the local martingale theory of bubbles, sufficient conditions are provided, under which this QV explosion can occur. Another possible explosion is also identified due to an autoregressive (AR) drift. Using the S\&P 500 index and a sample of individual stocks over 1996-2021, the existence of price bubbles is documented and is tested for the existence of price explosions. Almost all price explosion episodes discovered are associated with QV and not the AR drift channel.
