Risky Debt and Optimal Coupon Policy and Other Optimal Strategies

Diana Dorobantu and Monique Pontier
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Diana Dorobantu: Laboratoire de Statistique et Probabilités. Université Paul Sabatier, Toulouse, F31 062 TOULOUSE cedex, France
Monique Pontier: Laboratoire de Statistique et Probabilités. Université Paul Sabatier, Toulouse, F31 062 TOULOUSE cedex, France

Chapter 5 in Stochastic Processes and Applications to Mathematical Finance, 2007, pp 85-95 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe model developed is a structural valuation model of risky debt which includes a dynamic of debt. The value of the firm follows either a Brownian dynamic or a mixed Brownian-Poisson dynamic. The default threshold is endogenous; thus the optimal default threshold changes as the firm's value changes. Another optimal control problem is setting with respect to a couple (coupon or dividend policy, stopping time). Hence a local time is introduced in the firm value dynamic, being the optimal coupon or dividend policy. Once again an optimal threshold is given.

Keywords: Stochastic Calculus; Mathematical Finance; Insider Trading; Stochastic Control; Real Options; Filtering Model of Credit Risks; Stochastic Growth Models (search for similar items in EconPapers)
Date: 2007
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