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Personal Bankruptcy as a Real Option

Author

Listed:
  • Vyacheslav Mikhed
  • Barry Scholnick
  • Guozhong Zhu

Abstract

We provide a novel explanation to the longstanding puzzle of the ?missing bankruptcy ?lings.? Even though a household with a negative net worth will receive contemporaneous bene?t from bankruptcy, there may be greater insurance value from delaying the ?ling. Household bankruptcy is thus an American-style put option, which is not necessarily exercised even if the option is \"in the money.\" Based on the value functions in the household?s dynamic programming problem, we formulate the value of the bankruptcy option as well as the exercise price. We estimate a life-cycle model in which households choose the optimal time to exercise their bankruptcy option.

Suggested Citation

  • Vyacheslav Mikhed & Barry Scholnick & Guozhong Zhu, 2019. "Personal Bankruptcy as a Real Option," Working Papers 19-46, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:19-46
    DOI: 10.21799/frbp.wp.2019.46
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    Cited by:

    1. Balloch, Adnan & Engels, Christian & Philip, Dennis, 2022. "When It Rains It Drains: Psychological Distress and Household Net Worth," Journal of Banking & Finance, Elsevier, vol. 143(C).

    More about this item

    Keywords

    personal bankruptcy; option value; life cycle; secured and unsecured debts;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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