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The impact of asset price bubbles on liquidity risk measures from a financial institutions perspective

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  • Michael Jacobs Jr.

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.

Suggested Citation

  • Michael Jacobs Jr., 2016. "The impact of asset price bubbles on liquidity risk measures from a financial institutions perspective," International Journal of Bonds and Derivatives, Inderscience Enterprises Ltd, vol. 2(2), pages 152-182.
    • Handle: RePEc:ids:ijbder:v:2:y:2016:i:2:p:152-182
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    Cited by:

    1. Michael Jacobs, Jr., 2023. "The Detection of Asset Price Bubbles in the Cryptocurrency Markets with an Application to Risk Management and the Measurement of Model Risk," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 15(7), pages 1-46, July.

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