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Bubbles as violations of efficient time-scales

Author

Listed:
  • Hyun-U Sohn

    (ETH Zurich)

  • Didier Sornette

    (ETH Zurich)

Abstract

It is commonly overlooked that the concept of market efficiency embowers a time-dimension. Illustrating with an example from the class of persistent random walks, we show that a price process can be a martingale on one time-scale but inefficient on another. This means that just as market efficiency can only be defined relative to an information set, it also depends on a time scale. We use this hitherto neglected aspect to propose a new definition of bubbles that does not rely on `fundamental value`: A bubble is a violation of the efficient time-scale in that the market starts to `need longer` to reflect the original information set. That is, just as excess volatility is a violation of market efficiency with respect to its filtration, bubbles are a violation of market efficiency with respect to its time-scale.

Suggested Citation

  • Hyun-U Sohn & Didier Sornette, 2017. "Bubbles as violations of efficient time-scales," Working Papers Series 65, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:65
    DOI: 10.2139/ssrn.3081563
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    File URL: https://www.ineteconomics.org/research/research-papers/bubbles-as-violations-of-efficient-time-scales
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    Cited by:

    1. Samuel W. Akingbade & Marian Gidea & Matteo Manzi & Vahid Nateghi, 2023. "Why Topological Data Analysis Detects Financial Bubbles?," Papers 2304.06877, arXiv.org.

    More about this item

    Keywords

    Bubbles; Efficient markets; Martingales; Persistent random walks; Methodology; Market microstructure;
    All these keywords.

    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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