On Optimal Periodic Dividend Strategies in the Dual Model with Diffusion

27 Pages Posted: 28 Mar 2014 Last revised: 1 Apr 2015

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: February 17, 2014

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 (February 17, 2014). Insurance: Mathematics and Economics, Vol. 55C (2014), pp. 210-224. Available at SSRN: https://ssrn.com/abstract=2416724

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

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