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Default Risk, Asset Pricing, and Debt Control

Title data

Grüne, Lars ; Semmler, Willi:
Default Risk, Asset Pricing, and Debt Control.
In: Journal of Financial Econometrics. Vol. 3 (2005) Issue 1 . - pp. 79-106.
ISSN 1479-8417
DOI: https://doi.org/10.1093/jjfinec/nbi006

Abstract in another language

The pricing and control of firms' debt has become a major issue since Merton's (1974) seminal paper. Yet, Merton as well as other recent theories presume that the asset value of the firm is independent of the debt of the firm. However, when using debt finance firms may have to pay a premium for an idiosyncratic default risk and may face debt constraints. We demonstrate that firm specific debt constraints and endogeneous risk premia, based on collateralized borrowing, affect the asset value of the firm and, in turn, the collateral value of the firm. In order to explore the interdependence of debt finance and asset pricing of firms we endogenize default premia and borrowing constraints in a production based asset pricing model. In this context the dynamic decision problem of maximizing the present value of the firm faces an additional constraint giving rise to the debt dependent firm value. We solve for the asset value of the firm with debt finance by the use of numerical dynamic programming and set valued numerical techniques. This allows us to solve the debt control problem and to compute sustainable debt as well as the firm's debt value.

Further data

Item Type: Article in a journal
Refereed: Yes
Institutions of the University: Faculties
Faculties > Faculty of Mathematics, Physics und Computer Science
Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics
Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics > Chair Mathematics V (Applied Mathematics)
Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics > Chair Mathematics V (Applied Mathematics) > Chair Mathematics V (Applied Mathematics) - Univ.-Prof. Dr. Lars Grüne
Result of work at the UBT: Yes
DDC Subjects: 500 Science
500 Science > 510 Mathematics
Date Deposited: 02 Mar 2021 10:45
Last Modified: 23 Mar 2021 09:13
URI: https://eref.uni-bayreuth.de/id/eprint/63569