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 Sanjiv Das & Seoyoung Kim won first place in the ISB Summer Research Conference

Tuesday, Jul. 30, 2013

Professors of Finance Sanjiv Das and Seoyoung Kim won first place at the India School of Business (ISB) Summer Research Conference held in Hyderabad, India, for their paper titled “Credit Spreads with Dynamic Debt.” Professors from universities across the world presented their research papers at this conference, vying for the first place prize of $5,000. Of the 100 applications submitted, 15 papers were chosen to be presented, with first place being split between Das and Kim, and Christian Wolff of the University of Luxembourg. The first place prize was awarded by the National Stock Exchange on July 27.

The abstract of Das and Kim’s paper:

We extend the baseline Merton (1974) structural default model, which is intended for static debt guarantees, to a setting with dynamic debt, where leverage can be ratcheted up as well as written down through pre-specified policies. For many dynamic debt covenants, ex-ante credit spread term structures can be derived in closed-form using modified barrier option mathematics, whereby debt guarantees can be expressed using combinations of single barrier options (both knock-in and knock-out), double barrier options, double-touch barrier options, in-out barrier options, and one-touch double barrier binary options. We observe that principal write-down covenants decrease the magnitude of credit spreads but increase the slope of the credit curve, transforming downward sloping curves into upward sloping ones. On the other hand, ratchet covenants increase the magnitude of ex-ante spreads without dramatically altering the slope of the credit curve. Overall, explicitly modeling this latent option to alter debt leads to term structures of credit spreads that are more consistent with observed empirics.

A short article with more informatoin by The New Indian Express can be found here»

Learn more about Professor Sanjiv Das here»

Learn more about Professor Seoyoung Kim here»

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