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Banks must optimize risky investments, dividend payouts, and capital structure under tight Basel III solvency and liquidity constraints, while costly equity issuance serves as a distress-recovery tool. We formulate this as a stochastic control problem that reduces the high-dimensional balance-sheet dynamics to a tractable one-dimensional process in the asset-to-deposit ratio, with state-dependent investment limits. T…
We revisit the optimal capital structure model with endogenous bankruptcy first studied by Leland \cite{Leland94} and Leland and Toft \cite{Leland96}. Differently from the standard case, where shareholders observe continuously the asset value and bankruptcy is executed instantaneously without delay, we assume that the information of the asset value is updated only at intervals, modeled by the jump times of an indepen…
Shareholders' expectations of stock returns and fluctuations are constantly changing due to restrictions in financial status and undesirable capital structure, which constrain managers to limit the changes in price trends in order to cover the risk instigated and infused by the unfavorable situation. The present research examines the moderating impact of information asymmetry on the relationship between capital struc…
This research investigates the multifaceted relationship underlying capital structure dynamics along with financial performance as a result of mergers and acquisitions, or M&As, in Indian banks. In the face of increasing competition, banks have deliberately embraced M&A as a strategy of improving commercial prospects and maintaining financial stability. The primary goal of this study is to examine the changes in the …
Among the various factors affecting the firms positioning and performance in modern day markets, capital structure of the firm has its own way of expressing itself as a crucial one. With the rapid changes in technology, firms are being pushed onto a paradigm that is burdening the capital management process. Hence the study of capital structure changes gives the investors an insight into firm's behavior and intrinsic …
This thesis mainly focuses on two problems in capital structure and individual's life-cycle portfolio choice. In the first problem, we derive a stochastic control model to optimize banks' dividend and recapitalization policies and calibrate that to a sample of U.S. banks in the situation where we model banks' true accounting asset values as partially observed variables due to the opaqueness in banks' assets. By the c…
ABSTRACT This article examines the optimal capital structure of a firm that can choose both the amount and maturity of its debt. Bankruptcy is determined endogenously rather than by the imposition of a positive net worth condition or by a cash flow constraint. The results extend Leland's (1994a) closed‐form results to a much richer class of possible debt structures and permit study of the optimal maturity of debt as …
We extend the now classic structural credit modeling approach of Black and Cox to a class of "two-factor" models that unify equity securities such as options written on the stock price, and credit products like bonds and credit default swaps. In our approach, the two sides of the stylized balance sheet of a firm, namely the asset value and debt value, are assumed to follow a two dimensional Markov process. Amongst mo…
Changes in the capital structure before and after the global financial crisis for SMEs are studied, emphasizing their financing problems, distinguishing between internal financing and external financing determinants. The empirical research bears upon 158 small and medium-sized firms listed on Shenzhen and Shanghai Stock Exchanges in China over the period of 2004-2014. A regression analysis, along the lines of the Tra…
ABSTRACT Most structural models of default preclude the firm from altering its capital structure. In practice, firms adjust outstanding debt levels in response to changes in firm value, thus generating mean‐reverting leverage ratios. We propose a structural model of default with stochastic interest rates that captures this mean reversion. Our model generates credit spreads that are larger for low‐leverage firms, and …
We present SAiFE_gym, a Python module that provides a collection of simulation environments for studying trading problems in Constant Product Markets (CPMs) with Concentrated Liquidity (CL). These markets give Liquidity Providers (LPs) granular control over how their capital is allocated and enable them to adjust their range of liquidity provision dynamically based on market conditions, which in turn, dictates how th…
This paper introduces a novel stochastic model for credit spreads. The stochastic approach leverages the diffusion of default intensities via a CIR++ model and is formulated within a risk-neutral probability space. Our research primarily addresses two gaps in the literature. The first is the lack of credit spread models founded on a stochastic basis that enables continuous modeling, as many existing models rely on fa…
We propose a unified structural credit risk model incorporating both insolvency and illiquidity risks, in order to investigate how a firm's default probability depends on the liquidity risk associated with its financing structure. We assume the firm finances its risky assets by mainly issuing short- and long-term debt. Short-term debt can have either a discrete or a more realistic staggered tenor structure. At rollov…
We establish a general matched filter principle for order flow normalization: optimal normalization must match the scaling behaviour of the signal-generating process. For capacity-constrained institutional investors, market capitalization normalization ($S^{MC}$) is the matched filter; for volume-targeting traders (e.g., VWAP/TWAP algorithms), trading value normalization ($S^{TV}$) is optimal. Monte Carlo simulations…
Contingent Convertible bonds (CoCos) are debt instruments that convert into equity or are written down in times of distress. Existing pricing models assume conversion triggers based on market prices and on the assumption that markets can always observe all relevant firm information. But all Cocos issued so far have triggers based on accounting ratios and/or regulatory intervention. We incorporate that markets receive…
The principal portfolios of the standard Capital Asset Pricing Model (CAPM) are analyzed and found to have remarkable hedging and leveraging properties. Principal portfolios implement a recasting of any correlated asset set of N risky securities into an equivalent but uncorrelated set when short sales are allowed. While a determination of principal portfolios in general requires a detailed knowledge of the covariance…
A clearing member of a Central Counterparty (CCP) is exposed to losses on their default fund and initial margin contributions. Such losses can be incurred whenever the CCP has insufficient funds to unwind the portfolio of a defaulting clearing member. This does not necessarily require the default of the CCP itself. In this note we aim to quantify the risk a financial institution has when facing a CCP. We show that a …
We performed a comprehensive analysis on the price bounds of CDO tranche options, and illustrated that the CDO tranche option prices can be effectively bounded by the joint distribution of default time (JDDT) from a default time copula. Systemic and idiosyncratic factors beyond the JDDT only contribute a limited amount of pricing uncertainty. The price bounds of tranche option derived from a default time copula are o…
Debt-to-equity is interest-bearing debt divided by book (or market) equity — a headline leverage ratio that hides maturity and covenants.
EBIT is earnings before interest and tax — operating profit after depreciation, before capital structure and the tax man.
Enterprise value is the market value of operating assets — equity plus net debt and other non-equity claims, minus non-operating cash.