Abstracts

We analyze the capital structure of a firm in a infinite time horizon framework following Leland's idea [1] under the more general hypothesis that the firm value process belongs to a fairly large class of stochastic volatility models.
Following Fouque et al. approximating methods [2], in such a scheme, we describe and analyze the effects of stochastic volatility on all variables describing the capital structure. The endogenous failure level is derived in order to exploit the optimal amount of debt chosen by the firm. Exploiting optimal capital structure we find that the stochastic volatility framework seems to be a robust way to improve results in the direction of both higher spreads and lower leverage ratios in a quantitatively significant way.

[1] Leland H.E. (1994), ``Corporate debt value, bond covenant, and optimal capital structure', The Journal of Finance, 49, 1213-1252.
[2] Fouque J.P., Papanicolaou G., Ronnie K.R., Derivatives in Financial Markets with Stochastic Volatility, Cambridge University Press (2000).