Optimal Default Boundary in Discrete Time Models
by Agata Altieri of the Universitá di Padova, and
Abstract: In this paper we solve the problem of determining the default time of a firm in such a way as to maximize its total value, which includes bankruptcy costs and tax benefits, with the condition that the value of equity must be nonnegative. By applying dynamic programming in discrete time, we find results which extends those of Merton (1974), and we give an application for the approximation of models driven by a Brownian motion or a Poisson process.
Keywords: Credit and default risk, optimal stopping, dynamic programming.