We extend the credit risk valuation framework introduced by Gatfaoui (2003) to stochastic volatility models. We state a general setting for valuing risky debt in the light of systematic risk and idiosyncratic risk, which are known to affect each risky asset in the financial market. The option...

Recent literature focuses on the systematic and specific components of credit risk (Dichev [1998], Wilson [1998], Jarrow, Lando & Yu [2001]). It is currently assumed, at least implicitly, that financial data are all subject to one latent systematic factor (Jarrow, Lando & Yu [2001], Lucas,...

This paper presents an equilibrium model of industry dynamics and capital structure decisions. The unique stationary equilibrium is derived in closed-form. The analysis reveals that the interaction between capital structure and production decisions influences the stationary distribution of...

This paper examines how the investment of financially constrained firms varies with their level of internal funds. We develop a theoretical model of optimal investment under financial constraints. Our model endogenizes the costs of external funds and allows for negative levels of internal funds....

Net-worth covenants, as introduced by Black and Cox (1976), provide the firm’s bondholders with the right to force reorganization or liquidation if the value of the firm falls below a certain threshold. In the event of default, however, many bankruptcy codes stipulate an automatic stay of...

This paper provides a general framework for pricing of real options in continuous time for wide classes of payoff streams that are functions of Levy processes. As applications, we calculate the option values of multi-stage investment/disinvestment problems (sequences of embedded options, which...

Continuous time models in the theory of real options give explicit formulas for optimal exercise strategies when options are simple and the price of an underlying asset follows a geometric Brownian motion. This paper suggests a general, computationally simple approach to real options in discrete...

This paper is an extended version of the paper 'Practical Guide to Real Options in Discrete Time' (http://econwpa.wustl.edu:80/eps/fin/papers/0405/0405016.pdf), where a general, computationally simple approach to real options in discrete time was suggested. We explicitly formulate conditions of...

The paper examines the interpretation of firms' investment-cash flow sensitivity as an artifact of financial market imperfection. Two alternative explanations of the financial constraints are compared. One is based on informational problems (asymmetric information). The other focuses on limited...

In April 2001 Swiss banks held over CHF 500 billion in mortgages. This important segment accounts for about 63\% of all the loan portfolios of Swiss banks. In this paper we restrict our attention to residential mortgages held by private clients, i.e. borrowers who finance their property by the...