EconPapers    
Economics at your fingertips  
 

Optimal capital structure and endogenous default

Bianca Hilberink () and L.C.G. Rogers ()
Additional contact information
Bianca Hilberink: Department of Mathematical Sciences, University of Bath, Bath BA2 7AY, UK
L.C.G. Rogers: Department of Mathematical Sciences, University of Bath, Bath BA2 7AY, UK

Finance and Stochastics, 2002, vol. 6, issue 2, 237-263

Abstract: In a sequence of fascinating papers, Leland and Leland and Toft have investigated various properties of the debt and credit of a firm which keeps a constant profile of debt and chooses its bankruptcy level endogenously, to maximise the value of the equity. One feature of these papers is that the credit spreads tend to zero as the maturity tends to zero, and this is not a feature which is observed in practice. This defect of the modelling is related to the diffusion assumptions made in the papers referred to; in this paper, we take a model for the value of the firm's assets which allows for jumps, and find that the spreads do not go to zero as maturity goes to zero. The modelling is quite delicate, but it just works; analysis takes us a long way, and for the final steps we have to resort to numerical methods.

Keywords: Credit risk; optimal capital structure; Wiener-Hopf factorisation; corporate debt; default (search for similar items in EconPapers)
JEL-codes: D92 G32 G33 (search for similar items in EconPapers)
Date: 2002-03-12
References: Add references at CitEc
Citations: View citations in EconPapers (44) Track citations by RSS feed

Downloads: (external link)
http://link.springer.de/link/service/journals/00780/papers/2006002/20060237.pdf (application/pdf)
Access to the full text of the articles in this series is restricted

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:spr:finsto:v:6:y:2002:i:2:p:237-263

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla ().

 
Page updated 2019-04-09
Handle: RePEc:spr:finsto:v:6:y:2002:i:2:p:237-263