Asset price bubbles and risk management

Robert Jarrow ()

Journal of Risk

Abstract: The purpose of this paper is to review the literature on asset price bubbles to study the impact that the existence of bubbles has on standard risk management methodologies. In the presence of asset price bubbles, a trader’s optimal portfolio holdings decrease and a financial institution’s optimal level of equity capital needs to be increased relative to a market without bubbles. Further, risk-neutral valuation for derivatives is often incorrect and the standard hedging techniques are suboptimal.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ4:5340371

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