On Optimal Periodic Dividend Strategies in the Dual Model with Diffusion
27 Pages Posted: 28 Mar 2014 Last revised: 1 Apr 2015
Date Written: February 17, 2014
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
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