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Numerical analysis of strategic contingent claims models

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  • Anderson, Ronald W.

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • Tu, Cheng

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

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.

Suggested Citation

  • Anderson, Ronald W. & Tu, Cheng, 1996. "Numerical analysis of strategic contingent claims models," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1997004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Jan 1997.
  • Handle: RePEc:ctl:louvir:1997004
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/9704.pdf
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    References listed on IDEAS

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    1. 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).
    2. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Mella-Barral, Pierre & Perraudin, William, 1997. " Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-556, June.
    6. 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.
    7. Anderson, Ronald W. & Sundaresan, Suresh & Tychon, Pierre, 1996. "Strategic analysis of contingent claims," European Economic Review, Elsevier, vol. 40(3-5), pages 871-881, April.
    8. 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.
    9. 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.
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    More about this item

    Keywords

    contigent claims; computational finance; credit risk;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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