Effects of Positive Jumps of Assets on Endogenous Bankruptcy and Optimal Capital Structure: Continuous- and Periodic-Observation Models

DOI10.1137/20M1362127zbMATH Open1473.91025arXiv2008.10651MaRDI QIDQ5162845FDOQ5162845

Authors: Dante Mata López, Kazutoshi Yamazaki, José Luis Pérez Garmendia 

Publication date: 5 November 2021

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: In this paper, we study the optimal capital structure model with endogenous bankruptcy when the firm's asset value follows an exponential L'evy process with positive jumps. In the Leland-Toft framework cite{LelandToft96}, we obtain the optimal bankruptcy barrier in the classical continuous-observation model and the periodic-observation model, recently studied by Palmowski et al. cite{palmowski2019leland}. We further consider the two-stage optimization problem of obtaining the optimal capital structure. Detailed numerical experiments are conducted to study the sensitivity of the firm's decision-making with respect to the observation frequency and positive jumps of the asset value.

Full work available at URL: https://arxiv.org/abs/2008.10651

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zbMATH Keywords

credit riskendogenous bankruptcyoptimal capital structurespectrally positive Lévy processes

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Credit risk (91G40) Stopping times; optimal stopping problems; gambling theory (60G40)

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Cited In (10)

• Time‐average stochastic control based on a singular local Lévy model for environmental project planning under habit formation
• Optimal capital structure and simultaneous bankruptcy of firms in corporate networks
• Modelling the duration of firms in Chapter 11 bankruptcy using a flexible model
• Optimal Stopping for Exponential Lévy Models with Weighted Discounting
• Optimal capital structure and endogenous default
• Precautionary measures for credit risk management in jump models
• Lévy bandits under Poissonian decision times
• The Leland-Toft optimal capital structure model under Poisson observations
• Principles of smooth and continuous fit in the determination of endogenous bankruptcy levels
• Optimal capital structure with scale effects under spectrally negative Lévy models

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