Risk Premia and Optimal Liquidation of Defaultable Securities
This paper studies the optimal timing to liquidate defaultable securities in a general intensity-based credit risk model under stochastic interest rate. We incorporate the potential price discrepancy between the market and investors, which is characterized by risk-neutral valuation under different default risk premia specifications. To quantify the value of optimally timing to sell, we introduce the delayed liquidation premium which is closely related to the stochastic bracket between the market price and a pricing kernel. We analyze the optimal liquidation policy for various credit derivatives. Our model serves as the building block for the sequential buying and selling problem. We also discuss the extensions to a jump-diffusion default intensity model as well as a defaultable equity model.
- Leung_Liu_Sep2011.pdf application/pdf 339 KB Download File
More About This Work
- Academic Units
- Industrial Engineering and Operations Research
- Published Here
- October 3, 2011