Risk Measures and the Impact of Asset Price Bubbles

23 Pages Posted: 20 Oct 2013 Last revised: 10 Jun 2016

See all articles by Robert A. Jarrow

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Felipe Bastos G. Silva

University of Missouri, Columbia

Date Written: May 7, 2014

Abstract

This paper analyzes the impact of asset price bubbles on a firm's standard risk measures, including value-at-risk (VaR) and conditional value-at-risk (CVaR). Comparing a bubble and non-bubble economy, it is shown that asset price bubbles cause (i) a firm's VaR and CVaR to decline, but (ii) increase its expected daily and maximum daily losses. This decline in the standard risk measures is due to the increased right skew in a firm value's distribution due to bubble expansion. The increase in the expected daily losses is due to bubble bursting. This implies that the standard risk measures are not adequate for equity capital determination in the present of asset price bubbles, and that scenario analysis which include bursting bubbles are essential for the proper determination of equity capital.

Suggested Citation

Jarrow, Robert A. and Silva, Felipe Bastos G., Risk Measures and the Impact of Asset Price Bubbles (May 7, 2014). Journal of Risk, 2015, Available at SSRN: https://ssrn.com/abstract=2341641 or http://dx.doi.org/10.2139/ssrn.2341641

Robert A. Jarrow (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Felipe Bastos G. Silva

University of Missouri, Columbia ( email )

331 Cornell Hall
Columbia, MO 65211
United States
5738829905 (Phone)

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