Optimal Bankruptcy with a Continuous Debt Repayment

We investigate the optimal consumption and investment problem when a working debtor has an option to file for bankruptcy. By applying the duality approach, the closed-form solutions are obtained for the case of CRRA utility function. The optimal bankruptcy time is determined by the first hitting tim...

Full description

Saved in:
Bibliographic Details
Published in:Management science & financial engineering 2016, Vol.22 (1), p.13-20
Main Author: Lim, Byung Hwa
Format: Article
Language:Korean
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We investigate the optimal consumption and investment problem when a working debtor has an option to file for bankruptcy. By applying the duality approach, the closed-form solutions are obtained for the case of CRRA utility function. The optimal bankruptcy time is determined by the first hitting time when the financial wealth hits the wealth threshold derived from the optimal stopping time problem. Moreover, the numerical results show that the investment increases as the wealth approaches the threshold and the value gain from the bankruptcy option is vanished as wealth increases.
ISSN:2287-2043
2287-2361