Modeling Financial Bubbles with Optional Semimartingales in Nonstandard Probability Spaces

Deviation of an asset price from its fundamental value, commonly referred to as a price bubble, is a well-known phenomenon in financial markets. Mathematically, a bubble arises when the deflated price process transitions from a martingale to a strict local martingale. This paper explores price bubbles using the framework of optional semimartingale calculus within nonstandard probability spaces, where the underlying filtration is not necessarily right-continuous or complete. We present two formulations for financial markets with bubbles: one in which asset prices are modeled as càdlàg semimartingales and another where they are modeled as làdlàg semimartingales. In both models, we demonstrate that the formation and re-emergence of price bubbles are intrinsically tied to the lack of right continuity in the underlying filtration. These theoretical findings are illustrated with practical examples, offering novel insights into bubble dynamics that hold significance for both academics and practitioners in the field of mathematical finance.

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Publication Details

Journal
Risks
Published
2025-03-17
DOI
https://doi.org/10.3390/risks13030053
Primary Topic
Complex Systems and Time Series Analysis
Type
article
Field-Weighted Citation Impact
0.00

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article

Modeling Financial Bubbles with Optional Semimartingales in Nonstandard Probability Spaces

Alexander Melnikov, Mohamed Abdelghani
Risks
Complex Systems and Time Series Analysis
article

Modeling Financial Bubbles with Optional Semimartingales in Nonstandard Probability Spaces

Alexander Melnikov, Mohamed Abdelghani
article en

Abstract

Deviation of an asset price from its fundamental value, commonly referred to as a price bubble, is a well-known phenomenon in financial markets. Mathematically, a bubble arises when the deflated price process transitions from a martingale to a strict local martingale. This paper explores price bubbles using the framework of optional semimartingale calculus within nonstandard probability spaces, where the underlying filtration is not necessarily right-continuous or complete. We present two formulations for financial markets with bubbles: one in which asset prices are modeled as càdlàg semimartingales and another where they are modeled as làdlàg semimartingales. In both models, we demonstrate that the formation and re-emergence of price bubbles are intrinsically tied to the lack of right continuity in the underlying filtration. These theoretical findings are illustrated with practical examples, offering novel insights into bubble dynamics that hold significance for both academics and practitioners in the field of mathematical finance.

RisksVol. 13(3)
University of Alberta (CA), Wells Fargo (United States) (US)
Natural Sciences and Engineering Research Council of Canada
Openalex Percentile: Top 92%
Complex Systems and Time Series Analysis
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Modeling Financial Bubbles with Optional Semimartingales in Nonstandard Probability Spaces — Alexander Melnikov, Mohamed Abdelghani · Risks (2025) | TGRS Research Map | TGRS