A stochastic model of optimal debt management and bankruptcy

Alberto Bressan, Antonio Marigonda, Khai T. Nguyen, Michele Palladino

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

A problem of optimal debt management is modeled as a noncooperative interaction between a borrower and a pool of lenders, in an infinite time horizon with exponential discount. The yearly income of the borrower is governed by a stochastic process. When the debt-To-income ratio x(t) reaches a given size x∗, bankruptcy instantly occurs. The interest rate charged by the risk-neutral lenders is precisely determined in order to compensate for this possible loss of their investment. For a given bankruptcy threshold x,∗ existence and properties of optimal feedback strategies for the borrower are studied, in a stochastic framework as well as in a limit deterministic setting. The paper also analyzes how the expected total cost to the borrower changes, depending on difierent values of x-.

Original languageEnglish (US)
Pages (from-to)841-873
Number of pages33
JournalSIAM Journal on Financial Mathematics
Volume8
Issue number1
DOIs
StatePublished - Jan 1 2017

Fingerprint

Bankruptcy
Stochastic models
Random processes
Stochastic Model
Feedback
Discount
Interest Rates
Costs
Stochastic Processes
Horizon
Interaction
Income
Stochastic model
Debt management
Strategy
Framework
Stochastic processes
Debt
Interest rates
Time horizon

All Science Journal Classification (ASJC) codes

  • Numerical Analysis
  • Finance
  • Applied Mathematics

Cite this

Bressan, Alberto ; Marigonda, Antonio ; Nguyen, Khai T. ; Palladino, Michele. / A stochastic model of optimal debt management and bankruptcy. In: SIAM Journal on Financial Mathematics. 2017 ; Vol. 8, No. 1. pp. 841-873.
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A stochastic model of optimal debt management and bankruptcy. / Bressan, Alberto; Marigonda, Antonio; Nguyen, Khai T.; Palladino, Michele.

In: SIAM Journal on Financial Mathematics, Vol. 8, No. 1, 01.01.2017, p. 841-873.

Research output: Contribution to journalArticle

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