The Optimal Capital Structure Under Stable Lévy Assets Returns

Decisions in Economics and Finance, Vol. 31, No. 1, p.51-72, 2008

19 Pages Posted: 1 Mar 2006 Last revised: 26 Dec 2010

See all articles by Olivier Le Courtois

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Francois Quittard-Pinon

EMLYON Business School

Date Written: February 22, 2006

Abstract

This article builds a new structural default model under the assumption that assets returns follow dynamics displaying jumps of both signs. In essence, we expand the work of Hilberink and Rogers which is itself an extension of the Leland and Toft framework, but that deals only with negative jumps. We make use here of stable Lévy processes, and this enables us to compute the values of the firm, debt and equity. Theoretical credit spreads can also be obtained in our framework and prove to be consistent with the empirical credit spreads observed on the markets.

Keywords: Optimal Capital Structure, Default Risk, Stable Processes, Credit Spreads

JEL Classification: C60, G32

Suggested Citation

Le Courtois, Olivier Arnaud and Quittard-Pinon, Francois, The Optimal Capital Structure Under Stable Lévy Assets Returns (February 22, 2006). Decisions in Economics and Finance, Vol. 31, No. 1, p.51-72, 2008. Available at SSRN: https://ssrn.com/abstract=886303

Olivier Arnaud Le Courtois (Contact Author)

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

Francois Quittard-Pinon

EMLYON Business School ( email )

23, Avenue Guy de Collongue
69134, Ecully
France

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