Bauer Business Focus

Stock Market: Anticipating Crash Risk

Guest: Professor Paola Pederzoli


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Anticipating crash risk in the stock market can be challenging. Professor Paola Pederzoli with the Bauer College of Business at the University of Houston says there may be a way to know if the bubble is going to burst.

It is difficult to measure the likelihood of extreme events that may not have occurred yet, such as stock market crashes. But interestingly, we can extract investor crash risk perception from stock market crash insurance prices and study its evolution through time.

Crash insurance prices have increased over time, in particular after the 2008/2009 financial crisis. The restrictions imposed on selling a stock versus buying a stock contribute to inflate the stock prices and to increase the perception of the risk of an imminent crash in the stock market.

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