Pricing of Debt and Equity in a Financial Network with Comonotonic Endowments

Tathagata Banerjee () and Zachary Feinstein ()
Additional contact information
Tathagata Banerjee: Department of Electrical and Systems Engineering, Washington University in St. Louis, St. Louis, Missouri 63130
Zachary Feinstein: School of Business, Stevens Institute of Technology, Hoboken, New Jersey 07030

Operations Research, 2022, vol. 70, issue 4, 2085-2100

Abstract: In this paper, we present formulas for the valuation of debt and equity of firms in a financial network under comonotonic endowments. We demonstrate that the comonotonic setting provides a lower bound and Jensen’s inequality provides an upper bound to the price of debt under Eisenberg-Noe financial networks with bankruptcy costs. Such financial networks encode the interconnection of firms through debt claims. The proposed pricing formulas consider the realized, endogenous recovery rate on debt claims. We endogenously construct the comonotonic endowment setting from an equity maximizing standpoint with capital transfers. We conclude by, numerically, comparing the network valuation problem with two single firm baseline heuristics that can, respectively, approximate the price of debt and equity.

Keywords: Financial Engineering; network valuation; financial networks; default contagion; systemic risk; credit risk (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/opre.2022.2275 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:70:y:2022:i:4:p:2085-2100

Access Statistics for this article

More articles in Operations Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().