Management Science and Financial Engineering

The Korean Operations Research and Management Science Society (한국경영과학회)
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Optimal Bankruptcy with a Continuous Debt Repayment

  • Lim, Byung Hwa (Department of Economics and Finance, The University of Suwon)
  • Received : 2016.04.06
  • Accepted : 2016.05.23
  • Published : 2016.05.31
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Abstract

We investigate the optimal consumption and investment problem when a working debtor has an option to file for bankruptcy. By applying the duality approach, the closed-form solutions are obtained for the case of CRRA utility function. The optimal bankruptcy time is determined by the first hitting time when the financial wealth hits the wealth threshold derived from the optimal stopping time problem. Moreover, the numerical results show that the investment increases as the wealth approaches the threshold and the value gain from the bankruptcy option is vanished as wealth increases.

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Acknowledgement

Supported by : National Research Foundation of Korea

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