Testing for asset price bubbles: three new approaches

Abstract

Testing for the existence of asset price bubbles is a difficult task. This paper shows that the local martingale theory of bubbles provides three new approaches that can be used to test for the existence of asset price bubbles, two of which are currently unexplored in the literature. The first is based on specifying a stochastic process for the asset's price process. The second exploits option price data, if options trade on the asset suspected to exhibit a price bubble. The third uses a multiple-factor model for the return process of the underlying asset.