The Martingale Theory of Bubbles: Implications for the Valuation of Derivatives and Detecting Bubbles

The martingale theory of bubbles studies the existence and characterization of asset price bubbles in continuous time and continuous trading economies under both the no arbitrage (no free lunch vanishing risk) and no dominance hypotheses. We review this theory, with an emphasis on understanding its implications for the valuation of derivatives and detecting asset price bubbles.

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