A Non-Stationary Model of Dividend Distribution in A Stochastic Interest-Rate Setting

25 Pages Posted: 8 Aug 2014

See all articles by Andrea Barth

Andrea Barth

ETH Zürich

Santiago Moreno-Bromberg

University of Zurich - Department Finance

Oleg Reichmann

ETH Zürich - Department of Mathematics

Date Written: August 6, 2014

Abstract

In this paper the solutions to several variants of the so-called dividend-distribution problem in a multi-dimensional setting are studied. In a nutshell, the manager of a firm must balance the retention of earnings (so as to ward off bankruptcy and earn interest) and the distribution of dividends (so as to please the shareholders). A dynamic-programming approach is used, where the state variables are the current levels of cash reserves and of the stochastic short-rate, as well as time. This results in a family of Hamilton-Jacobi-Bellman variational inequalities whose solutions must be approximated numerically. To do so, a finite-element approximation and a time-marching scheme are employed.

Keywords: Dividend distribution, singular stochastic control, numerical methods for partial differential equations, finite element method.

JEL Classification: C61, C63, G11

Suggested Citation

Barth, Andrea and Moreno-Bromberg, Santiago and Reichmann, Oleg, A Non-Stationary Model of Dividend Distribution in A Stochastic Interest-Rate Setting (August 6, 2014). Available at SSRN: https://ssrn.com/abstract=2476961 or http://dx.doi.org/10.2139/ssrn.2476961

Andrea Barth

ETH Zürich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Santiago Moreno-Bromberg (Contact Author)

University of Zurich - Department Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Oleg Reichmann

ETH Zürich - Department of Mathematics ( email )

R¨amistrasse 101
Raemistr. 101
Z¨urich, 8092
Switzerland

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