This study presents an analysis of the impact of asset price bubbles on standard credit risk measures,\nincluding Expected Loss (ââ?¬Å?ELââ?¬Â) and Credit Value-at-Risk (ââ?¬Å?CVaRââ?¬Â). We present a styled model\nof asset price bubbles in continuous time, and perform a simulation experiment of a 2 dimensional\nStochastic Differential Equation (ââ?¬Å?SDEââ?¬Â) system for asset value determining Probability of Default\n(ââ?¬Å?PDââ?¬Â) through a Constant Elasticity of Variance (ââ?¬Å?CEVââ?¬Â) process, as well as a correlated a Loss-\nGiven-Default (ââ?¬Å?LGDââ?¬Â) through a mean reverting Cox-Ingersoll-Ross (ââ?¬Å?CIRââ?¬Â) process having a longrun\nmean dependent upon the asset value. Comparing bubble to non-bubble economies, it is\nshown that asset price bubbles may cause an obligorââ?¬â?¢s traditional credit risk measures, such as EL\nand CVaR to decline, due to a reduction in both the standard deviation and right skewness of the\ncredit loss distribution. We propose a new risk measure in the credit risk literature to account for\nlosses associated with a bubble bursting, the Expected Holding Period Credit Loss (ââ?¬Å?EHPCLââ?¬Â), a\nphenomenon that must be taken into consideration for the proper determination of economic\ncapital for both credit risk management and measurement purposes.
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