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A Differential Game of Debt Contract Valuation

In: Modeling Uncertainty

Author

Listed:
  • A. Haurie

    (University of Geneva)

  • F. Moresino

    (Cambridge University)

Abstract

This paper deals with a problem of uncertainty management in corporate finance. It represents, in a continuous time setting, the strategic interaction between a firm owner and a lender when a debt contract has been negotiated to finance a risky project. The paper takes its inspiration from a model by Anderson and Sundaresan (1996) where a simplifying assumption on the information structure was used. This model is a good example of the possible contribution of stochastic games to modern finance theory. In our development we consider the two possible approaches for the valuation of risky projects: (i) the discounted expected net present value when the firm and the debt are not traded on a financial market, (ii) the equivalent risk neutral valuation when the equity and the debt are considered as derivatives traded on a spanning market. The Nash equilibrium solution is characterized qualitatively.

Suggested Citation

  • A. Haurie & F. Moresino, 2002. "A Differential Game of Debt Contract Valuation," International Series in Operations Research & Management Science, in: Moshe Dror & Pierre L’Ecuyer & Ferenc Szidarovszky (ed.), Modeling Uncertainty, chapter 0, pages 269-283, Springer.
    • Handle: RePEc:spr:isochp:978-0-306-48102-4_13
    DOI: 10.1007/0-306-48102-2_13
    as

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