On Optimal Periodic Dividend Strategies in the Dual Model with Diffusion

28 Pages Posted: 21 Sep 2013

See all articles by Benjamin Avanzi

Benjamin Avanzi

UNSW Australia Business School, School of Risk and Actuarial Studies

Vincent Tu

UNSW Australia Business School, School of Risk & Actuarial Studies

Bernard Wong

UNSW Australia Business School, School of Risk & Actuarial Studies

Multiple version iconThere are 2 versions of this paper

Date Written: September 20, 2013

Abstract

The dual model with diffusion is appropriate for companies with continuous expenses that are offset by stochastic and irregular gains. Examples include research-based or commission-based companies. In this context, Bayraktar et al. (2013a) show that a dividend barrier strategy is optimal when dividend decisions are made continuously. In practice, however, companies that are capable of issuing dividends make dividend decisions on a periodic (rather than continuous) basis.

In this paper, we consider a periodic dividend strategy with exponential inter-dividend-decision times and continuous monitoring of solvency. Assuming hyperexponential gains, we show that a periodic barrier dividend strategy is the periodic strategy that maximises the expected present value of dividends paid until ruin. Interestingly, a ‘liquidation-at-first-opportunity’ strategy is optimal in some cases where the surplus processes has a positive drift. Results are illustrated.

Keywords: Optimal dividends, Dual model, Stochastic Control, Periodic barrier

JEL Classification: C44, C61, G24, G32, G35

Suggested Citation

Avanzi, Benjamin and Tu, Vincent and Wong, Bernard, On Optimal Periodic Dividend Strategies in the Dual Model with Diffusion (September 20, 2013). UNSW Australian School of Business Research Paper No. 2013ACTL17. Available at SSRN: https://ssrn.com/abstract=2328577 or http://dx.doi.org/10.2139/ssrn.2328577

Benjamin Avanzi

UNSW Australia Business School, School of Risk and Actuarial Studies ( email )

UNSW Sydney, NSW 2052
Australia

Vincent Tu (Contact Author)

UNSW Australia Business School, School of Risk & Actuarial Studies ( email )

Room 2058 South Wing 2nd Floor
Quadrangle building, Kensington Campus
Sydney, NSW 2052
Australia

Bernard Wong

UNSW Australia Business School, School of Risk & Actuarial Studies ( email )

Room 2058 South Wing 2nd Floor
Quadrangle building, Kensington Campus
Sydney, NSW 2052
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
67
Abstract Views
1,075
rank
216,978
PlumX Metrics