An Option-Based Model of Equilibrium Credit Rationing
This paper applies options theory to the model of equilibrium credit rationing developed by Stiglitz and Weiss (1981) by noticing that, given a standard debt contract and limited liability, the payoffs to the lender and the borrower when a loan is make involve a put option and a call option respectively. Information asymmetry is modelled using stochastic volatility option pricing methods.
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- Ito, Takatoshi & Ueda, Kazuo, 1981. "Tests of the Equilibrium Hypothesis in Disequilibrium Econometrics: An International Comparison of Credit Rationing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 691-708, October.
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- Chesney, Marc & Scott, Louis, 1989. "Pricing European Currency Options: A Comparison of the Modified Black-Scholes Model and a Random Variance Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 267-284, September.
- Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 651-666.
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