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Strategic Default Jump as Impulse Control in Continuous Time

Listed author(s):
  • Hisashi Nakamura

    (Faculty of Economics, University of Tokyo)

Registered author(s):

    This paper presents a new approach for modeling an optimal debt contract in continuous time. It examines a competing contract design in a continuous-time environment with Markov income shocks and costly veri able information. It shows that an optimal contract has the form of a long-term debt contract that permits a debtor's strategic default and debt restructuring. The default is characterized by a recurrent, optimal impulse control beyond default. Numerical examples show that the equilibrium probability of the default is decreasing in the monitoring technology level when the default causes a big wealth loss.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2007/2007cf532.pdf
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    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-532.

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    Length: 28 pages
    Date of creation: Dec 2007
    Handle: RePEc:tky:fseres:2007cf532
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    1. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409 World Scientific Publishing Co. Pte. Ltd..
    2. Mella-Barral, Pierre & Perraudin, William, 1997. " Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-556, June.
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    5. Hisashi Nakamura, 2006. "A Dynamic Theory of Debt Restructuring," CARF F-Series CARF-F-072, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    6. Noah Williams, 2004. "On Dynamic Principal-Agent Problems in Continuous Time," Levine's Bibliography 122247000000000426, UCLA Department of Economics.
    7. Biais, Bruno & Mariotti, Thomas & Plantin, Guillaume & Rochet, Jean-Charles, 2004. "Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications," IDEI Working Papers 312, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2006.
    8. Simon, Leo K & Stinchcombe, Maxwell B, 1989. "Extensive Form Games in Continuous Time: Pure Strategies," Econometrica, Econometric Society, vol. 57(5), pages 1171-1214, September.
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    10. Umut Çetin & Robert Jarrow & Philip Protter & Yildiray Yildirim, 2008. "Modeling Credit Risk With Partial Information," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 23, pages 579-590 World Scientific Publishing Co. Pte. Ltd..
    11. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.
    12. 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.
    13. Darrell Duffie & Lasse Heje Pedersen & Kenneth J. Singleton, 2003. "Modeling Sovereign Yield Spreads: A Case Study of Russian Debt," Journal of Finance, American Finance Association, vol. 58(1), pages 119-159, 02.
    14. PETER M. DeMARZO & YULIY SANNIKOV, 2006. "Optimal Security Design and Dynamic Capital Structure in a Continuous-Time Agency Model," Journal of Finance, American Finance Association, vol. 61(6), pages 2681-2724, December.
    15. Gregory R. Duffee, 1996. "Estimating the price of default risk," Finance and Economics Discussion Series 96-29, Board of Governors of the Federal Reserve System (U.S.).
    16. Hisashi Nakamura, 2006. "A Dynamic Theory of Debt Restructuring," CIRJE F-Series CIRJE-F-433, CIRJE, Faculty of Economics, University of Tokyo.
    17. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
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