The impact of asset price bubbles on liquidity risk measures from a financial institutions perspective. (2016)

• Record Type: Journal Article
• Authors: Jacobs, Michael
• Is Part Of: International journal of bonds and derivatives. Volume 2:Number 2(2016)
• Page Start: 152
• Page End: 182
• Publication Date: 2016
• Subjects: financial crisis -- liquidity risks -- model risks -- asset price bubbles -- value-at-risk -- VAR model -- stochastic differential equations -- SDE -- constant elasticity of variance -- CEV -- risk measures -- financial institutions -- simulation -- skewness -- underpricing; Bonds -- Periodicals; Derivative securities -- Periodicals; Capital market -- Periodicals; 332.63205
• Languages: English
• ISSNs: 2050-2281

Abstract

This study presents an analysis of the impact of asset price bubbles on a liquidity risk measure, the liquidity risk option premium ('LROP'). We present a styled model of asset price bubbles in continuous time, and perform a simulation experiment of a stochastic differential equation ('SDE') system for the asset value through a constant elasticity of variance ('CEV') process. Comparing bubble to non-bubble economies, it is shown that asset price bubbles may cause an firm's traditional risk measures, such as value-at-risk ('VaR') to decline, due to an increase in the right skewness of the value distribution, which results in the LROP to decline and therefore an underpricing of liquidity risk.