Department of Mathematics

Speaker: Qihe Tang
Title: The Double-barrier Default of a Time-Homogeneous Diffusion Model
Affiliation: University of Iowa
Date: Friday, April 20, 2012
Place and Time: Room 101, Love Building, 3:35-4:30 pm
Refreshments: Room 204, Love Building, 3:00 pm

Abstract. We are interested in the default risk of a firm. Let a<b and c>0 be three exogenously determined constants, with a interpreted as the liquidity threshold, b as the reorganization threshold and c as the grace period. The firm is considered as defaulted whenever its value either goes below level a or constantly stays below level b for c units of time. Economic justifications for this concept of default are the US bankruptcy codes Chapter 7 (Liquidation) and Chapter 11 (Reorganization). We model the firm value by a time-homogeneous diffusion process and derive an explicit formula for the non-default probability. This talk is based on a joint work with Bin Li and Xiaowen Zhou. A preliminary draft of the work is available from qihe-tang@uiowa.edu.