Countercyclical Value at Risk Using Market Bubbles and Stock Market Crash Risk
Keywords:
Value at Risk, Price Bubble, Stock Market Crash Risk, Countercyclical RiskAbstract
In this study, a countercyclical value-at-risk (VaR) measure was introduced and estimated using the market bubble in order to assess and predict the crash risk of the Tehran Stock Exchange. To estimate the countercyclical VaR, the long-term and equilibrium price trend was first calculated using Kaufman’s Adaptive Moving Average, and based on this trend, the deviation from equilibrium was computed as the bubble index in the Tehran Stock Exchange. Subsequently, using the bubble index, a metric for inflation (compensation) of returns in the direction opposite to the bubble was introduced. On this basis, raw returns were transformed in a manner that incorporated the presence of bubbles in the market, and the bubble-adjusted value-at-risk measure was calculated using these transformed data. This study utilized daily data from the Tehran Stock Exchange index over the period 2015 to 2024. The findings indicate that the standard value-at-risk has a higher explanatory power for stock market crash risk compared to the countercyclical value-at-risk; however, interpretation of the model coefficients shows that the countercyclical VaR provides a more logically consistent explanation of the relational mechanism between value-at-risk and stock market crash risk.
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Copyright (c) 2025 Laleh Rohi (Author); Seyed Ali Nabavi Chashmi; Mohammad Nasrollahi (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
