A dynamic program for valuing corporate securities

Mohamed A. Ayadi, Hatem Ben-Ameur and Tarek Fakhfakh

European Journal of Operational Research, 2016, vol. 249, issue 2, 751-770

Abstract: We design and implement a dynamic program for valuing corporate securities, seen as derivatives on a firm’s assets, and computing the term structure of yield spreads and default probabilities. Our setting is flexible for it accommodates an extended balance-sheet equality, arbitrary corporate debts, multiple seniority classes, and a reorganization process. This flexibility comes at the expense of a minor loss of efficiency. The analytical approach proposed in the literature is exchanged here for a quasi-analytical approach based on dynamic programming coupled with finite elements. To assess our construction, which shows flexibility and efficiency, we carry out a numerical investigation along with a complete sensitivity analysis.

Keywords: Option theory; Structural models; Corporate securities; Corporate bonds; Dynamic programming (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:249:y:2016:i:2:p:751-770

DOI: 10.1016/j.ejor.2015.10.026

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