A Model of Credit Risk, Optimal Policies, and Asset Prices
AbstractThis article studies an economy with borrowers (firms or individuals) under costly default. Borrowers defaulting under adverse economic conditions may, despite incurring default costs, emerge as wealthier than nonborrowers. Asset substitution is generally not pronounced, although a larger risk exposure by borrowers may also occur, and then binary options emerge as useful credit derivatives. The asset-value dynamics are endogenously determined and shown to exhibit stochastic mean and volatility, in contrast to many credit risk models. In equilibrium, the market level is increased (decreased) in economic downturns (upturns) by the presence of credit risk.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 78 (2005)
Issue (Month): 4 (July)
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Web page: http://www.journals.uchicago.edu/JB/
Other versions of this item:
- Basak, Suleyman & Shapiro, Alex, 2002. "A Model of Credit Risk, Optimal Policies and Asset Prices," CEPR Discussion Papers 3413, C.E.P.R. Discussion Papers.
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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- Li Chen & H. Vincent Poor, 2003. "Information Asymmetry, Corporate Debt Financing and Optimal Investment Decisions: A Reduced Form Approach," Finance 0312008, EconWPA.
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