  This paper highlights the role of risk neutral investors in generating
endogenous bubbles in derivatives markets. We find that a market for
derivatives, which has all the features of a perfect market except completeness
and has some risk neutral investors, can exhibit extreme price movements which
represent a violation to the Gaussian random walk hypothesis. This can be
viewed as a paradox because it contradicts wide-held conjectures about prices
in informationally efficient markets with rational investors. Our findings
imply that prices are not always good approximations of the fundamental values
of derivatives, and that extreme price movements like price peaks or crashes
may have endogenous origin and happen with a higher-than-normal frequency.
