A Differential Game of Debt Contract Valuation

  • A. Haurie
  • F. Moresino
Part of the International Series in Operations Research & Management Science book series (ISOR, volume 46)


This paper deals with a problem of uncertainty management in corporate finance. It represents, in a continuous time setting, the strategic interaction between a firm owner and a lender when a debt contract has been negotiated to finance a risky project. The paper takes its inspiration from a model by Anderson and Sundaresan (1996) where a simplifying assumption on the information structure was used. This model is a good example of the possible contribution of stochastic games to modern finance theory. In our development we consider the two possible approaches for the valuation of risky projects: (i) the discounted expected net present value when the firm and the debt are not traded on a financial market, (ii) the equivalent risk neutral valuation when the equity and the debt are considered as derivatives traded on a spanning market. The Nash equilibrium solution is characterized qualitatively.


Nash Equilibrium Cash Flow Differential Game Stochastic Game Debt Service 
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Copyright information

© Springer Science + Business Media, Inc. 2002

Authors and Affiliations

  • A. Haurie
    • 1
  • F. Moresino
    • 2
  1. 1.University of GenevaGenevaSwitzerland
  2. 2.Cambridge UniversityUK

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