Article ID: | iaor201530460 |
Volume: | 249 |
Issue: | 2 |
Start Page Number: | 751 |
End Page Number: | 770 |
Publication Date: | Mar 2016 |
Journal: | European Journal of Operational Research |
Authors: | Ben-Ameur Hatem, Ayadi Mohamed A, Fakhfakh Tarek |
Keywords: | programming: dynamic, finance & banking |
We design and implement a dynamic program for valuing corporate securities, seen as derivatives on a firm’s assets, and computing the term structure of yield spreads and default probabilities. Our setting is flexible for it accommodates an extended balance‐sheet equality, arbitrary corporate debts, multiple seniority classes, and a reorganization process. This flexibility comes at the expense of a minor loss of efficiency. The analytical approach proposed in the literature is exchanged here for a quasi‐analytical approach based on dynamic programming coupled with finite elements. To assess our construction, which shows flexibility and efficiency, we carry out a numerical investigation along with a complete sensitivity analysis.