Finite Time Dividend-Ruin Models

25 Pages Posted: 22 Feb 2007

See all articles by Yue Kuen Kwok

Yue Kuen Kwok

Hong Kong University of Science & Technology - Department of Mathematics

Kwai Sun Leung

Hong Kong University of Science & Technology (HKUST)

Seng Yuen Leung

Independent

Date Written: February 2007

Abstract

We consider the finite time horizon dividend-ruin model where the firm pays out dividends to its shareholders according to a dividend-barrier strategy and becomes ruined when the firm asset value falls below the default threshold. The asset value process is modeled as a restricted Geometric Brownian process with an upper reflecting (dividend) barrier and a lower absorbing (ruin) barrier. Analytic solutions to the value function of the restricted asset value process are provided. We also solve for the survival probability and the expected present value of future dividend payouts over a given time horizon. The sensitivities of the firm asset value and dividend payouts to the dividend barrier, volatility of the firm asset value and firm's credit quality are also examined.

Keywords: dividend-ruin model, dividend payouts, reflecting and absorbing barriers

JEL Classification: G31

Suggested Citation

Kwok, Yue Kuen and Leung, Kwai Sun and Leung, Seng Yuen, Finite Time Dividend-Ruin Models (February 2007). Available at SSRN: https://ssrn.com/abstract=964089 or http://dx.doi.org/10.2139/ssrn.964089

Yue Kuen Kwok (Contact Author)

Hong Kong University of Science & Technology - Department of Mathematics ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Kwai Sun Leung

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Seng Yuen Leung

Independent ( email )

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