Numerical analysis of strategic contingent claims models
We study the numerical properties of a class of models recently introduced to calculate the values of corporate bonds and other corporate liabilities. Starting from a discrete-time extensive form game representing the consequences of financial distress, these ``strategic contingent claims models" are associated with a particular free-boundary problem. Here we consider the properties of alternative solution techniques applied to this problem. We discuss four solution techniques of the finite difference type: explicit solutions, explicit solutions of the log transformed model, implicit solutions on a regular grid, and dynamically remeshed implicit solutions. To our knowledge this last method has not previously been employed in financial applications. We find that use of dynamic remeshing can speed calculation solutions enormously. This opens the way to applying strategic contingent claims models in practical applications.
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| Length: | 20 |
| Date of creation: | 01 Sep 1996 |
| Date of revision: | 00 Jan 1997 |
| Handle: | RePEc:ctl:louvir:1997004 |
| Contact details of provider: | Postal: Place Montesquieu 3, 1348 Louvain-la-Neuve (Belgium) Fax: +32 10473945 Web page: https://uclouvain.be/en/research-institutes/immaq/ires Email: More information through EDIRC
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- Pierre Mella-Barral, 1995. "Optimal Debt Exchange Offers," Working Papers hal-00607533, HAL.
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- Pierre Mella-Barral, 1995. "Optimal Debt Exchange Offers," Working Papers hal-00607533, HAL.
- Mella-Barral, Pierre, 1995. "Optimal Debt Exchange Offers," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1995022, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- Anderson, Ronald W & Sundaresan, Suresh, 1996. "Design and Valuation of Debt Contracts," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 37-68.
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- Weiss, Lawrence A., 1990. "Bankruptcy resolution: Direct costs and violation of priority of claims," Journal of Financial Economics, Elsevier, vol. 27(2), pages 285-314, October.
- Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July. Full references (including those not matched with items on IDEAS)
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