FIN546 Continuous Time Finance: Credit Risk and Capital Structure

• Topics

  The course is a primer in the classical continuous asset pricing theory applied to pricing of credit risk and choice of capital structure. Structural models jointly address valuation of corporate securities and choice of financial structure. We cover the optimal (static) model capital strucure model including extensions as choice of debt maturity, several debt classes, creditor renogiations, and asymmetric and/or noisy information. We also cover the dynamic model where debt positions can be changed throughout time. Some recent/new applications are also included.

• Learning outcome

  Upon course completion, the candidate can:

  Knowledge:

  • Discuss and summarize the current research frontier of the continuous time credit risk and capital structure theory.

  Skills: 

  • Formulate problems, plan and carry out research within the above mentioned topics.

  Competence:

  • Communicate and discuss research with a peer audience.
  • Do independent research on the topics of this course.

• Teaching

  6 lectures of 3 hours in April-June 2022 (tentatively)

• Restricted access

  The course is open for PhD students in finance or other PhD students who can document basic knowledge in asset pricing. Advanced master students may apply to take the course, but are subject to approval from the course responsible on a case by case basis.

• Recommended prerequisites

  Basic knowledge of asset pricing.

• Compulsory Activity

  Class participation.

  One or two homework sets.

• Assessment

  Individual term paper (100%)

• Grading Scale

  Pass-fail

• Computer tools

  Models are implemented in R and/or Maple.

• Literature

  The basics: Duffie, Dynamic Asset Pricing,  Ch 5/Ch 11 Black/Scholes (1973) Merton (1973) Merton (1974) Duffie/Lando (2001) Leland (1994) Goldstein, Ju, Leland (2001) Extensions: Debt maturity: Leland/Toft 1998  Dynamic capital structure: Christensen, Floor, Lando, Miltersen (2014) Renegotiations (TBA) Asymmetric information:Duffie/Lando 2001, Lindset, Lund, Persson (2014)

  Banking: Dermine/Lajerie (2001), Atreya, Mjøs, Persson (2019), Nagel,Purnanandam (2019)

  More than one debt class: Lindset, Nygaard, Persson (2019)

  (reading list will be updated)