Classical and singular stochastic control for the optimal dividend policy when there is regime switching
AbstractMotivated by economic and empirical arguments, we consider a company whose cash surplus is affected by macroeconomic conditions. Specifically, we model the cash surplus as a Brownian motion with drift and volatility modulated by an observable continuous-time Markov chain that represents the regime of the economy. The objective of the management is to select the dividend policy that maximizes the expected total discounted dividend payments to be received by the shareholders. We study two different cases: bounded dividend rates and unbounded dividend rates. These cases generate, respectively, problems of classical stochastic control with regime switching and singular stochastic control with regime switching. We solve these problems, and obtain the first analytical solutions for the optimal dividend policy in the presence of business cycles. We prove that the optimal dividend policy depends strongly on macroeconomic conditions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Insurance: Mathematics and Economics.
Volume (Year): 48 (2011)
Issue (Month): 3 (May)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505554
IM10 IE20 IE21 IE50 Business cycles Dividend policy Stochastic control Regime switching;
Find related papers by JEL classification:
- IM1 - Health, Education, and Welfare - - - - -
- IE2 - Health, Education, and Welfare - - - - -
- IE2 - Health, Education, and Welfare - - - - -
- IE5 - Health, Education, and Welfare - - - - -
- Bus - Schools of Economic Thought and Methodology - - - - -
- cyc - - - - - -
- Div - Microeconomics - - - - -
- pol - - - - - -
- Sto - - - - - -
- con - - - - - -
- Reg - Urban, Rural, Regional, Real Estate, and Transportation Economics - - - - -
- swi - - - - - -
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bjarne Højgaard & Søren Asmussen & Michael Taksar, 2000. "Optimal risk control and dividend distribution policies. Example of excess-of loss reinsurance for an insurance corporation," Finance and Stochastics, Springer, vol. 4(3), pages 299-324.
- Radner, Roy & Shepp, Larry, 1996. "Risk vs. profit potential: A model for corporate strategy," Journal of Economic Dynamics and Control, Elsevier, vol. 20(8), pages 1373-1393, August.
- Bjarne Højgaard & Michael Taksar, 2001. "Optimal risk control for a large corporation in the presence of returns on investments," Finance and Stochastics, Springer, vol. 5(4), pages 527-547.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Bjarne Hø jgaard & Michael Taksar, 1999. "Controlling Risk Exposure and Dividends Payout Schemes:Insurance Company Example," Mathematical Finance, Wiley Blackwell, vol. 9(2), pages 153-182.
- T. Choulli & M. Taksar & X. Y. Zhou, 2001. "Excess-of-loss reinsurance for a company with debt liability and constraints on risk reduction," Quantitative Finance, Taylor & Francis Journals, vol. 1(6), pages 573-596.
- Lu, Yi & Li, Shuanming, 2005. "On the probability of ruin in a Markov-modulated risk model," Insurance: Mathematics and Economics, Elsevier, vol. 37(3), pages 522-532, December.
- Zhu, Jinxia & Yang, Hailiang, 2008. "Ruin theory for a Markov regime-switching model under a threshold dividend strategy," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 311-318, February.
- Guo, Xin & Miao, Jianjun & Morellec, Erwan, 2005.
"Irreversible investment with regime shifts,"
Journal of Economic Theory,
Elsevier, vol. 122(1), pages 37-59, May.
- Taksar, Michael I. & Zhou, Xun Yu, 1998. "Optimal risk and dividend control for a company with a debt liability," Insurance: Mathematics and Economics, Elsevier, vol. 22(1), pages 105-122, May.
- Lu, Yi & Li, Shuanming, 2009. "The Markovian regime-switching risk model with a threshold dividend strategy," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 296-303, April.
- Asmussen, Soren & Taksar, Michael, 1997. "Controlled diffusion models for optimal dividend pay-out," Insurance: Mathematics and Economics, Elsevier, vol. 20(1), pages 1-15, June.
- Bong-Gyu Jang & Hyeng Keun Koo & Hong Liu & Mark Loewenstein, 2007. "Liquidity Premia and Transaction Costs," Journal of Finance, American Finance Association, vol. 62(5), pages 2329-2366, October.
- Jean-Paul Décamps & Stéphane Villeneuve, 2007.
"Optimal dividend policy and growth option,"
Finance and Stochastics,
Springer, vol. 11(1), pages 3-27, January.
- D’Auria, Bernardo & Kella, Offer, 2012. "Markov modulation of a two-sided reflected Brownian motion with application to fluid queues," Stochastic Processes and their Applications, Elsevier, vol. 122(4), pages 1566-1581.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.