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We develop a dynamic credit risk model for the case in which banks compete to collect their loans from a firm in danger of bankruptcy. We apply a game-theoretic real options approach to investigate banksf optimal strategies. Our model reveals that the bank with the larger loan amount, namely, the main bank, provides an additional loan to support th...
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... is because the follower cannot recover its loan principal immediately by the assumption Å and it thus has the incentive to make a debt assumption to wait for the firm's recovery. Figure 3 depicts the follower's loan value function with a solid bold line. It is always less than the monopoly loan value because of the "negative" option value. ...
Citations
... The last noteworthy BSM structural model was proposed by Shibata and Yamada (2009). They developed BSM structural model to model bank's recovery process for a firm in danger of bankruptcy. ...
... When obligor bankrupts, the bank's choice whether the firm should be run or be liquidated affects the losses of the loan. Shibata and Yamada (2009) assumed this decision is made at continuous time t after the bankruptcy. Using this option approach and incorporating the application of game theory, the paper described the property of the bank's collecting process. ...
This paper traces the developments of credit risk modeling in the past 10 years. Our work can be divided into two parts: selecting articles and summarizing results. On the one hand, by constructing an ordered logit model on historical Journal of Economic Literature (JEL) codes of articles about credit risk modeling, we sort out articles which are the most related to our topic. The result indicates that the JEL codes have become the standard to classify researches in credit risk modeling. On the other hand, comparing with the classical review Altman and Saunders (1998), we observe some important changes of research methods of credit risk. The main finding is that current focuses on credit risk modeling have moved from static individual-level models to dynamic portfolio models.
... This paper assumes, based on Sundaresan and Wang (2007), that pretax profit (earnings before interest and taxes, or EBIT) follows a geometric Brownian motion. Other papers, however, adopt a different definition whereby a firm's sales follow a geometric Brownian motion and profit is defined as sales minus operating costs (Mella-Barral and Perraudin [1997] and Shibata and Yamada [2009]). While this latter definition is more realistic in that it can result in negative profits, it is known that operating costs have almost no influence on investment decisions and simply change the level of the investment profits. ...
... 13. For details, see Shibata and Yamada (2009). 14. ...
Empirical studies have found that a low interest rate environment ac-celerates firms' investment and debt financing, leading to subsequent balance-sheet problems in many countries in recent years. We examine the mechanism whereby firms' debt financing and investment become more accelerated and the credit risk rises under a low interest rate environment from the perspective of a real options model. We find that firms tend to increase debt financing and investment not only under strong expecta-tions of continued low interest rates but also when there are expecta-tions of future interest rate increases, and such behavior causes higher credit risk. We also find that when future interest rate rises are expected, the investment decisions vary depending on how firms incorporate the possibility of future interest rises. Specifically, myopic firms make "last-minute investments" based on concerns over future interest rate hikes, and this behavior increases their credit risk. In contrast, economically rational firms choose to decrease their investments, carefully considering the likelihood of future interest rate hikes., the participants in the Mathe-matics for Finance Workshop, the Economics Statistics Workshop, and the Japan Association of Financial Econometrics and Engineering (JAFEE) 2009 Summer Conference, as well as the staff of the Institute for Monetary and Economic Studies (IMES), the Bank of Japan (BOJ), for their useful comments. Views expressed in this paper are those of the author and do not necessarily reflect the official views of the BOJ.
We develop a main bank model where the main bank decides whether or not to raise additional funds from the capital market to continue to invest in a borrowing firm when nonmain banks withdraw funds. We show that the threat of withdrawal of nonmain banks is more likely to force the main bank to perform efficiently in handling troubled loans, thereby preventing problems with zombie firms, if the potential cash flow (liquidation value) of the firm decreases (increases) relative to the amount funded by nonmain banks. The theoretical results provide both efficiency evaluations for the renewal of the main bank relation in Japan after the end of the 1990s and empirical implications for the renewed main bank system.
