By Alexandre Ziegler
This e-book offers a style that mixes video game conception and choice pricing so as to examine dynamic multiperson selection difficulties in non-stop time and below uncertainty. the fundamental instinct of the tactic is to split the matter of the valuation of payoffs from the research of strategic interactions. while the previous is to be dealt with utilizing choice pricing, the latter could be addressed by way of video game concept. The textual content indicates how either tools should be mixed and the way video game concept could be utilized to advanced difficulties of company finance and monetary intermediation. along with delivering theoretical foundations and serving as a consultant to stochastic online game idea modeling in non-stop time, the textual content comprises a variety of examples from the speculation of company finance and monetary intermediation. by way of combining arbitrage-free valuation concepts with strategic research, the sport thought research of concepts truly offers the hyperlink among markets and corporations.
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Extra resources for A Game Theory Analysis of Options: Contributions to the Theory of Financial Intermediation in Continuous Time
In doing so, different incentive effects of these two components of debt service can be analyzed. Second, the analysis below discusses endogenous bankruptcy as a principal-agent problem and quantifies the agency cost of debt. Third, stressing the game theory perspective of this book and furthering the analysis of Chapter 2, the effect of loan covenants and of the lender's information about asset value on risk-taking incentives is presented. Fourth, some interesting properties of optimal capital structure are explored.
1 Optimal Capital Structure Using the results on endogenous bankruptcy, the equity holders' capital structure choice can now be analyzed. Again, assume that asset substitution is not possible, so that 0" is known to the lender. Alternatively, we could assume that risk-shifting is, to a certain extent, possible but that the borrower cannot increase 0" without bound. In this case, th~ lender would simply anticipate the borrower's subsequent risk-shifting behavior and use the highest asset risk achievable by the borrower in his calculations.
3 The Value of the Firm and its Securities Once the game has been specified, the next step is to value the players' payoffs using option pricing theory, treating all the players' decision variables as parameters. This constitutes the object of this section. 4, we will then begin the analysis of the players' optimal strategies with the last decision to be made, namely, the equity holders' bankruptcy decision. 1 The Value of Debt The value of the borrower's assets, S, is assumed to follow the usual geometric Brownian motion (1) dS = pSdt + (JSdZ .
A Game Theory Analysis of Options: Contributions to the Theory of Financial Intermediation in Continuous Time by Alexandre Ziegler