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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)

Abstract

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.

Keywords

Nash Equilibrium Cash Flow Differential Game Stochastic Game Debt Service 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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References

  1. Anderson R.W. and S. Sundaresan. (1996). Design and Valuation of Debt Contracts, The Review of Financial Studies, Vol. 9, pp. 37–68.CrossRefGoogle Scholar
  2. Black F. and M. Scholes. (1973). The Pricing of Options and Corporate Liabilities, The Journal of Political Economy, Vol. 81, pp. 637–654.MathSciNetCrossRefGoogle Scholar
  3. Dixit A.K and R. S. Pindyck. (1993). Investment under Uncertainty, Princeton University press.Google Scholar
  4. Duffie D. (1992). Dynamic Asset Pricing Theory, Princeton University Press.Google Scholar

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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