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Identifying Stock Market Bubbles

Modeling Illiquidity Premium and Bid-Ask Prices of Financial Securities

  • Book
  • © 2017

Overview

Authors:
  1. Azar Karimov

    1. Institute of Applied Mathematics, Middle East Technical University, Ankara, Turkey

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  • Introduces an innovative new way to gauge when financial bubbles are about to burst
  • Provides a ready-to-use indicator that financial practitioners can directy apply
  • Presents extended versions of the Black-Scholes and Kou models

Part of the book series: Contributions to Management Science (MANAGEMENT SC.)

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Table of contents (8 chapters)

  1. Front Matter

    Pages i-xxi
    Download chapter PDF

  2. Introduction

    • Azar Karimov
    Pages 1-3

  3. Review on Research Conducted

    • Azar Karimov
    Pages 5-12

  4. Theory of Conic Finance

    • Azar Karimov
    Pages 13-21

  5. Stock Prices Follow a Brownian Motion

    • Azar Karimov
    Pages 23-35

  6. Stock Prices Follow a Double Exponential Jump-Diffusion Model

    • Azar Karimov
    Pages 37-71

  7. Numerical Implementation and Parameter Estimation Under KOU Model

    • Azar Karimov
    Pages 73-96

  8. Illiquidity Premium and Connection with Financial Bubbles

    • Azar Karimov
    Pages 97-118

  9. Conclusion and Future Outlook

    • Azar Karimov
    Pages 119-121

  10. Back Matter

    Pages 123-131
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Keywords

About this book

This book introduces readers to a new approach to identifying stock market bubbles by using the illiquidity premium, a parameter derived by employing conic finance theory. Further, it shows how to develop the closed form formulas of the bid and ask prices of European options by using Black-Scholes and Kou models. By using the derived formulas and sliding windows technique, the book explains how to numerically calculate illiquidity premiums. The methods introduced here will enable readers interested in risk management, portfolio optimization and hedging in real-time to identify when asset prices are in a bubble state and when that bubble bursts. Moreover, the techniques discussed will allow them to accurately recognize periods of exuberance and panic, and to measure how different strategies work during these phases with respect to calmer periods of market behavior. A brief history of financial bubbles and an outlook on future developments serve to round out the coverage. 

Authors and Affiliations

  • Institute of Applied Mathematics, Middle East Technical University, Ankara, Turkey

    Azar Karimov

About the author

Dr. Azar Karimov, CFA, FRM is a graduate in Financial Mathematics from the Institute of Applied Mathematics at Middle East Technical University. He has worked as a risk manager in intergovernmental diplomatic organization, Turkish private banking institutions and accumulated an extensive industry experience in liquidity management, financial risk management, stress testing, and asset-liability management. He has also delivered on-the- job trainings on advanced financial risk modelling at Turkish regulatory authorities.

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