A Differential Game of Debt Contract Valuation

A. Haurie and F. Moresino
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A. Haurie: University of Geneva
F. Moresino: Cambridge University

Chapter Chapter 13 in Modeling Uncertainty, 2002, pp 269-283 from Springer

Abstract: Abstract This paper deals with a problem of uncertainty management in corporate finance. It represents, in a continuous time setting, the strategic interaction between a firm owner and a lender when a debt contract has been negotiated to finance a risky project. The paper takes its inspiration from a model by Anderson and Sundaresan (1996) where a simplifying assumption on the information structure was used. This model is a good example of the possible contribution of stochastic games to modern finance theory. In our development we consider the two possible approaches for the valuation of risky projects: (i) the discounted expected net present value when the firm and the debt are not traded on a financial market, (ii) the equivalent risk neutral valuation when the equity and the debt are considered as derivatives traded on a spanning market. The Nash equilibrium solution is characterized qualitatively.

Keywords: Nash Equilibrium; Cash Flow; Differential Game; Stochastic Game; Debt Service (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isochp:978-0-306-48102-4_13

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DOI: 10.1007/0-306-48102-2_13

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