A Note on Realistic Dividends in Actuarial Surplus Models
9 Pages Posted: 19 Nov 2015 Last revised: 4 Aug 2016
Date Written: August 3, 2016
Because of the profitable nature of risk businesses in the long term, de Finetti (1957) suggested that surplus models should allow for cash leakages, as otherwise the surplus would unrealistically grow (on average) to the infinity. These leakages were interpreted as 'dividends'. Subsequent literature on actuarial surplus models with dividend distribution has mainly focussed on dividend strategies that either maximise the expected present value of dividends until ruin or lead to a probability of ruin that is inferior to one (Albrecher and Thonhauser, 2009; Avanzi, 2009). Few papers are directly interested in modelling dividend policies that are consistent with actual practice in financial markets. In this short note, we review the corporate finance literature with the specific aim of fleshing out properties that dividend strategies should ideally satisfy, if the objective of the model was one of practicality.
Keywords: surplus models, dividends, de Finetti, corporate finance
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