Jarrow and co find a better way to spot stock market bubbles
Quant team’s options-based approach avoids pitfalls of historical data dependence
As analysts warn about euphoria in US markets and the Cape ratio – economist Robert Shiller’s widely watched metric of stock market frothiness – nears all-time highs, investors could do with a reliable way to detect and measure asset bubbles.
As a matter of course, buy-siders weigh prices against model-derived reference points of fundamental value. But their reliance on historic data can leave these models open to question – especially when conditions change rapidly, as they have this past year
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