Liquidation Values and Debt Capacity: A Market Equilibrium Approach

The European debt crisis: Defaults and market equilibrium

During the last two years, Europe has been facing a debt crisis, and Greece has been at its center. In response to the crisis, drastic actions have been taken, including the halving of Greek debt. Policy makers acted because interest rates for sovereign debt increased dramatically. High interest rates imply that default is likely due to economic conditions. High interest rates also increase the...

Optimal Default and Liquidation with Tangible Assets and Debt Renegotiation

This paper proposes a new pricing model for corporate securities issued by a levered firm with the possibility of debt renegotiation. We take the structural approach that the firm’s earnings follow a geometric Brownian motion with stochastic collaterals. While equity holders can default the firm for their own benefits when the earnings become insufficient to go on the firm, they may want to liq...

The Value of Financial Flexibility: Equilibrium Liquidation Values and Endogenous Capital Structure Heterogeneity

Firms with lower leverage are not only less likely to experience financial distress but are also better positioned to acquire assets from other distressed firms. With endogenous asset sales and values, each firm’s debt choice then depends on the choices of its industry peers. With indivisible assets, otherwise identical firms may adopt different debt policies—some choosing highly levered operat...

Equilibrium Values in a Competitive Power Exchange Market

Optimal execution cost for liquidation through a limit order market

We study the problem of optimally liquidating a large portfolio position in a limit order book market. We allow for both limit and market orders and the optimal solution is a combination of both types of orders. Market orders deplete the order book, making future trades more expensive, whereas limit orders can be entered at more favorable prices but are not guaranteed to be filled. We model the...