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Contribution Details

Type Book Chapter
Scope Discipline-based scholarship
Title Bankruptcy triggering asset value–continuous time finance approach
Organization Unit
Authors
  • Jakub Rojcek
  • Karel Janda
Editors
  • Alberto Adrego Pinto
  • David Zilberman
Item Subtype Original Work
Refereed No
Status Published in final form
Language
  • English
Booktitle Modelling, Dynamics, Optimization and Bioeconomics I
Series Name Springer proceedings in mathematics and statistics
ISBN 978-3-319-04848-2
ISSN 2194-1009
Place of Publication Porto
Publisher Springer
Page Range 357 - 382
Date 2014
Abstract Text This paper utilizes means of game theory and option pricing to compute a bankruptcy triggering asset value. Combination of these two fields of economic study serves to separating the given problem into valuation of the payoffs, where we use option pricing and the analysis of strategic interactions between parties of a contract which could be designed and solved with the use of game theory. First of all, we design a contract between three parties each having a stake in the company, but with different rights reflected in the boundary conditions of the Black-Scholes equation. Then we will compute the values of debts and the whole value of the company. From here we directly compute the value of the firm’s equity and optimize it from the point of view of managing shareholders. The theoretically computed bankruptcy triggering asset value is then compared to the actual stock price. Depending on this relation, we may say whether the company is likely to go under or not. In addition, this article also provides reader with a real-life case study of the investment bank Bear Stearns and the optimal bankruptcy strategy in this particular case. As we will observe, the bankruptcy trigger computed in this example could have served as a good guide for predicting fall of this investment bank.
Digital Object Identifier 10.1007/978-3-319-04849-9_22
Other Identification Number merlin-id:9140
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