Equilibrium Defaultable Corporate Debt and Investment
In dynamic capital structure models with an investor break-even condition, the firm's Bellman equation may not generate a contraction mapping, so the standard existence and uniqueness conditions do not apply. First, we provide an example showing the problem in a classical trade-off model. The firm can issue one-period defaultable debt, invest in capital and pay a dividend. If the firm cannot meet the required debt payment, it is liquidated. Second, we show how to use a dual to the original problem and a change of measure, such that existence and uniqueness can be proved. In the unique Markov-perfect equilibrium, firm decisions reflect state-dependent capital and debt targets. Our approach may be useful for other dynamic firm models that have an investor break-even condition.
Code (0)
등록된 구현이 없습니다.
Similar Papers 제목 키워드 기반
Optimal excess-of-loss reinsurance and investment problem for an insurer with default risk under a stochastic volatility model
In this paper, we study an optimal excess-of-loss reinsurance and investment problem for an insurer in defaultable market. The insurer can buy reinsurance and invest in the following securities: a bank account, a risky a…
Defaultable bond liquidity spread estimation: an option-based approach
This paper extends an option-theoretic approach to estimate liquidity spreads for corporate bonds. Inspired by Longstaff's equity market framework and subsequent work by Koziol and Sauerbier on risk-free zero-coupon bond…
Optimal Credit Investment and Risk Control for an Insurer with Regime-Switching
This paper studies an optimal investment and risk control problem for an insurer with default contagion and regime-switching. The insurer in our model allocates his/her wealth across multi-name defaultable stocks and a r…
Auctioning Corporate Bonds: A Uniform-Price under Investment Mandates
This paper examines how risk and budget limits on investment mandates affect the bidding strategy in a uniform-price auction for issuing corporate bonds. I prove the existence of symmetric Bayesian Nash equilibrium and e…
Phase transitions in debt recycling
Debt recycling is an aggressive equity extraction strategy that potentially permits faster repayment of a mortgage. While equity progressively builds up as the mortgage is repaid monthly, mortgage holders may obtain anot…