EKSTRÖM, ERIK; TYSK, JOHAN - In: International Journal of Theoretical and Applied … 15 (2012) 06, pp. 1250041-1
We study Dupire's equation for local volatility models with bubbles, i.e. for models in which the discounted underlying asset follows a strict local martingale. If option prices are given by risk-neutral valuation, then the discounted option price process is a true martingale, and we show that...