Dynamics of bankrupt stocks

Xiao Li, Michael D. Lipkin, Richard B. Sowers

Research output: Contribution to journalArticlepeer-review

Abstract

We model and study the behavior of bankrupt stocks. We are interested in the dynamics of stocks and options, and in particular the cost of establishing positions with negative delta. This extends a model of Avellaneda and Lipkin which was used to model hard-to-borrow stocks. This model is a two-dimensional integrate-and-fire model which captures the self-reinforcing aspect of short squeezes and subsequent "crashes" when price support at some point vanishes. The only source of randomness in our model is the timing of these crashes. We understand the asymptotic behavior of this model and the risk-neutral measure.

Original languageEnglish (US)
Pages (from-to)232-257
Number of pages26
JournalSIAM Journal on Financial Mathematics
Volume5
Issue number1
DOIs
StatePublished - 2014

Keywords

  • Options pricing
  • Short squeeze

ASJC Scopus subject areas

  • Numerical Analysis
  • Finance
  • Applied Mathematics

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