Essays On Contingent Claims PDF Download

This dissertation includes three essays, which investigate contingent claims pricing subject to credit risk based on the structural approach and analyze associated issues of corporate finance. The first essay develops and examines a partial equilibrium model to investigate the effects of macroeconomic condition and firm-level productivity shocks on the determination of optimal debt ratio. The model extends the contingent-claims models of the firm's capital structure by incorporating both the industry demand and firm-level supply factors into the firm's earnings and unlevered asset value. Our model predicts that the optimal debt ratio is negatively correlated to the macroeconomic conditions and the firm-level productivity. Furthermore, the theoretical implications are totally supported by the pooled feasible generalized least squares estimation with 311 Taiwanese listed manufacturing firms' quarterly data over the period from 1994 to 2003. The differences between the high-tech electronics and other manufacturing firms are also investigated, and particularly the high-tech firms are not tied up with the macroeconomic conditions while the others are. The second essay presents a contingent claim valuation of a callable convertible bond with the issuer's credit risk. The optimal call, voluntary conversion and bankruptcy strategies are jointly determined by shareholders and bondholders to maximize the equity value and the bond value, respectively. Our model not only incorporates tax benefits, bankruptcy costs, refunding costs and a call notice period, but also takes account of the issuer's debt size and structure. The numerical results show that the predicted optimal call policies are generally consistent with recent empirical findings; therefore calling convertible bonds too late or too early can be rational. The third essay provides a closed-form valuation formula for the Black-Scholes options subject to interest rate risk and credit risk. Not only does our model allow f.