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Liquidation risk in the presence of Chapters 7 and 11 of the US bankruptcy code

Author

Listed:
  • Bin Li

    (Department of Statistics and Actuarial Science, University of Waterloo, 200 University Ave. West, Waterloo, Ontario N2L 3G1, Canada)

  • Qihe Tang

    (Department of Statistics and Actuarial Science, University of Iowa, 241 Schaeffer Hall, Iowa City, IA 52242, USA)

  • Lihe Wang

    (Department of Mathematics, University of Iowa, 14 MacLean Hall, Iowa City, IA 52242, USA;
    Department of Mathematics, Shanghai Jiaotong University, 800 Dongchuan Rd., Shanghai 200030, China)

  • Xiaowen Zhou

    (Department of Mathematics and Statistics, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, Quebec H3G 1M8, Canada)

Abstract

We aim at quantitatively measuring the liquidation risk of a firm subject to both Chapters 7 and 11 of the US bankruptcy code. The firm value is modeled by a general time-homogeneous diffusion process in which the drift and volatility are level dependent and can be easily adjusted to reflect the state changes of the firm. An explicit formula for the probability of liquidation is established, based on which we gain a quantitative understanding of how the capital structures before and during bankruptcy affect the probability of liquidation.

Suggested Citation

  • Bin Li & Qihe Tang & Lihe Wang & Xiaowen Zhou, 2014. "Liquidation risk in the presence of Chapters 7 and 11 of the US bankruptcy code," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 1(03), pages 1-19.
    • Handle: RePEc:wsi:jfexxx:v:01:y:2014:i:03:n:s2345768614500238
    DOI: 10.1142/S2345768614500238
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    References listed on IDEAS

    as
    1. Franck Moraux, 2002. "Valuing corporate liabilities when the default threshold is not an absorbing barrier," Post-Print halshs-00077168, HAL.
    2. Huang, Jen-Tsung & Lee, Kuo-Jung & Liang, Hueimei & Lin, Wei-Fu, 2010. "Erratum to "Estimating value at risk of portfolio by conditional copula-GARCH method" [Insurance: Mathematics and Economics 43 (2009) 315-324]," Insurance: Mathematics and Economics, Elsevier, vol. 46(2), pages 436-436, April.
    3. Damiano Brigo & Andrea Pallavicini, 2013. "CCPs, Central Clearing, CSA, Credit Collateral and Funding Costs Valuation FAQ: Re-hypothecation, CVA, Closeout, Netting, WWR, Gap-Risk, Initial and Variation Margins, Multiple Discount Curves, FVA?," Papers 1312.0128, arXiv.org, revised Dec 2013.
    4. Dassios, Angelos & Wu, Shanle, 2008. "Parisian ruin with exponential claims," LSE Research Online Documents on Economics 32033, London School of Economics and Political Science, LSE Library.
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    Citations

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    Cited by:

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    2. Roman N. Makarov, 2016. "Modeling liquidation risk with occupation times," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(04), pages 1-11, December.
    3. Li, Xin & Liu, Haibo & Tang, Qihe & Zhu, Jinxia, 2020. "Liquidation risk in insurance under contemporary regulatory frameworks," Insurance: Mathematics and Economics, Elsevier, vol. 93(C), pages 36-49.
    4. Makarov, R. & Metzler, A. & Ni, Z., 2015. "Modelling default risk with occupation times," Finance Research Letters, Elsevier, vol. 13(C), pages 54-65.
    5. Giuseppe Campolieti & Hiromichi Kato & Roman N. Makarov, 2022. "Spectral Expansions for Credit Risk Modelling with Occupation Times," Risks, MDPI, vol. 10(12), pages 1-20, November.
    6. Wenyuan Wang & Xiang Yu & Xiaowen Zhou, 2021. "On optimality of barrier dividend control under endogenous regime switching with application to Chapter 11 bankruptcy," Papers 2108.01800, arXiv.org, revised Nov 2023.
    7. Nguyen, Duy Phat & Borovkov, Konstantin, 2023. "Parisian ruin with random deficit-dependent delays for spectrally negative Lévy processes," Insurance: Mathematics and Economics, Elsevier, vol. 110(C), pages 72-81.
    8. Cheung, Eric C.K. & Zhu, Wei, 2023. "Cumulative Parisian ruin in finite and infinite time horizons for a renewal risk process with exponential claims," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 84-101.
    9. Eric C. K. Cheung & Jeff T. Y. Wong, 2023. "A Note on a Modified Parisian Ruin Concept," Risks, MDPI, vol. 11(3), pages 1-15, March.

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    More about this item

    Keywords

    Bankruptcy; liquidation; partial differential equation; time-homogeneous diffusion; two-sided exit problem; G33; C02; Primary 91G80; Secondary 62P05; Secondary 60J60;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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