Using Market BuVaR as countercyclical Value at Risk approach to account for the risks of stock market crashes

This paper uses stock market bubbles to inflate Value at Risk in order to achieve a countercyclical risk measure. The inflation of VaR generates an expected loss between the minimum loss and maximum loss and covers extreme returns which exceed VaR models. Furthermore, the relationship between bubbles and realized volatility is modelled and realized volatility is found to have a significant effect on bubbles which increases with the length of the realized volatility period. As a consequence, it is argued that longer periods of realized volatility have a significant influence on the formation of bubbles which in turn increase the crash risk in stock markets.