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Bankruptcy triggering asset value–continuous time finance approach


Rojcek, Jakub; Janda, Karel (2014). Bankruptcy triggering asset value–continuous time finance approach. In: Pinto, Alberto Adrego; Zilberman, David. Modelling, Dynamics, Optimization and Bioeconomics I. Porto, Portugal: Springer, 357-382.

Abstract

This paper utilizes means of game theory and option pricing to compute a bankruptcy triggering asset value. Combination of these two fields of economic study serves to separating the given problem into valuation of the payoffs, where we use option pricing and the analysis of strategic interactions between parties of a contract which could be designed and solved with the use of game theory. First of all, we design a contract between three parties each having a stake in the company, but with different rights reflected in the boundary conditions of the Black-Scholes equation. Then we will compute the values of debts and the whole value of the company. From here we directly compute the value of the firm’s equity and optimize it from the point of view of managing shareholders. The theoretically computed bankruptcy triggering asset value is then compared to the actual stock price. Depending on this relation, we may say whether the company is likely to go under or not. In addition, this article also provides reader with a real-life case study of the investment bank Bear Stearns and the optimal bankruptcy strategy in this particular case. As we will observe, the bankruptcy trigger computed in this example could have served as a good guide for predicting fall of this investment bank.

Abstract

This paper utilizes means of game theory and option pricing to compute a bankruptcy triggering asset value. Combination of these two fields of economic study serves to separating the given problem into valuation of the payoffs, where we use option pricing and the analysis of strategic interactions between parties of a contract which could be designed and solved with the use of game theory. First of all, we design a contract between three parties each having a stake in the company, but with different rights reflected in the boundary conditions of the Black-Scholes equation. Then we will compute the values of debts and the whole value of the company. From here we directly compute the value of the firm’s equity and optimize it from the point of view of managing shareholders. The theoretically computed bankruptcy triggering asset value is then compared to the actual stock price. Depending on this relation, we may say whether the company is likely to go under or not. In addition, this article also provides reader with a real-life case study of the investment bank Bear Stearns and the optimal bankruptcy strategy in this particular case. As we will observe, the bankruptcy trigger computed in this example could have served as a good guide for predicting fall of this investment bank.

Additional indexing

Item Type:Book Section, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2014
Deposited On:06 Feb 2014 07:51
Last Modified:05 Apr 2016 17:39
Publisher:Springer
Other Identification Number:merlin-id:9140

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