The optimal capital structure of the firm with stable Lévy assets returns (Q940998)

The authors propose a new model for the valuation of debt when assets are allowed to jump in both directions. The model assumes that the stochastic process \(V\) associated with firm's assets is given by the formula \(V_t=V_0 \exp(X_t)\) where \(X\) is a stable Lévy process with jumps of both signs that does not possess a diffusive component but allows for an infinite arrival rate of jumps. The work extends the framework of \textit{B. Hilberink} and \textit{L. C. G. Rogers} [Finance Stoch. 6, No. 2, 237--263 (2002; Zbl 1002.91019)] where only downward jumps are considered. Firm and debt values obtained in the paper are optimal with respect to leverage, and the authors compute credit spreads that are shown to be significantly not null at short maturities when the asset process admits jumps. The presented solutions can be expressed in terms of single or double inverse Laplace transforms, which need to be computed numerically.