No-arbitrage pricing under cross-ownership
AbstractWe generalize Merton's asset valuation approach to systems of multiple financial firms where cross-ownership of equities and liabilities is present. The liabilities, which may include debts and derivatives, can be of differing seniority. We derive equations for the prices of equities and recovery claims under no-arbitrage. An existence result and a uniqueness result are proven. Examples and an algorithm for the simultaneous calculation of all no-arbitrage prices are provided. A result on capital structure irrelevance for groups of firms regarding externally held claims is discussed, as well as financial leverage and systemic risk caused by cross-ownership.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1005.0768.
Date of creation: May 2010
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Publication status: Published in Fischer, T. (2012), NO-ARBITRAGE PRICING UNDER SYSTEMIC RISK: ACCOUNTING FOR CROSS-OWNERSHIP. Mathematical Finance. doi: 10.1111/j.1467-9965.2012.00526.x
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-15 (All new papers)
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