City Research Online

A structural model of debt pricing with creditor-determined liquidation

Bruche, M. and Naqvi, H. (2010). A structural model of debt pricing with creditor-determined liquidation. Journal of Economic Dynamics and Control, 34(5), pp. 951-967. doi: 10.1016/j.jedc.2010.01.005

Abstract

This paper develops a continuous time asset pricing model of debt and equity in a framework where equityholders decide when to default but creditors decide when to liquidate. This framework is relevant for environments where creditors exert a significant influence on the timing of liquidation, such as those of countries with creditor-friendly bankruptcy regimes, or in the case of secured debt. The interaction between the decisions of equityholders and creditors introduces an agency problem whereby equityholders default too early and creditors subsequently liquidate too early. Our model allows us to assess quantitatively how this problem affects the timing of default and liquidation, optimal capital structure, and spreads.

Publication Type: Article
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/2791
[img]
Preview
PDF
Download (307kB) | Preview

Export

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login