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Pricing of Debt and Equity in a Financial Network with Comonotonic Endowments

In this paper, we present formulas for the valuation of debt and equity of firms in a financial network under comonotonic endowments. We demonstrate that the comonotonic setting provides a lower bound and Jensen’s inequality provides an upper bound to the price of debt under Eisenberg-Noe financial networks with bankruptcy costs. Such financial networks encode the interconnection of firms through debt claims. The proposed pricing formulas consider the realized, endogenous recovery rate on debt claims. We endogenously construct the comonotonic endowment setting from an equity maximizing standpoint with capital transfers. We conclude by, numerically, comparing the network valuation problem with two single firm baseline heuristics that can, respectively, approximate the price of debt and equity.

Ketersediaan

Informasi Detail

Judul Seri

OPERATIONS RESEARCH; Vol.70 No.4 July-August 2022

No. Panggil

-

Penerbit

: .,

Deskripsi Fisik

p. 2085-2100

Bahasa

English

ISBN/ISSN

-

Klasifikasi

NONE

Tipe Isi

-

Tipe Media

-

Tipe Pembawa

-

Edisi

-

Subjek

CREDIT RISK
SYSTEMIC RISK
DEFAULT CONTAGION
FINANCIAL NETWORKS
NETWORK VALUATION

Info Detail Spesifik

https://doi.org/10.1287/opre.2022.2275

Pernyataan Tanggungjawab

Tathagata Banerjee, Zachary Feinstein

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