Year: 2010
Type: paratext
Abstract: This paper uses violations of put-call parity to provide simple lower and upper bounds for measuring the size of asset price bubbles.Assuming only no-arbitrage, this bubble detection approach avoids restrictive parametric model assumptions.We show that putcall disparity provides a bubble's lower bound, and the lowest price of an out-of-the-money call option determines the bubble's upper bound.To enhance precision in the presence of market frictions, we implement data-driven regularization and bootstrap.Using S&P 500 index option prices from 1996 to 2025, we document a sustained bubble during the COVID-19 era and capture market exuberance preceding the 2000 dot-com and 2008 financial crashes.The evidence also supports the assertion that stock markets are incomplete and often violates no-dominance.
Source: Financial Management
Author: Financial Management Association
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
Funder: University of Sydney
OpenAlex ID: W4234639436