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Optimal payout policy in presence of downside risk

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  • Luis Alvarez
  • Teppo Rakkolainen

Abstract

We analyze the determination of a value maximizing dividend payout policy for a broad class of cash reserve processes modeled as spectrally negative jump diffusions. We extend previous results based on continuous diffusion models and characterize the value of the optimal dividend distribution strategy explicitly. We also characterize explicitly the values as well as the optimal dividend thresholds for a class of associated optimal liquidation and sequential lump sum dividend control problems. Our results indicate that both the value as well as the marginal value of the optimal policies are increasing functions of policy flexibility in the discontinuous setting as well. Copyright Springer-Verlag 2009

Suggested Citation

  • Luis Alvarez & Teppo Rakkolainen, 2009. "Optimal payout policy in presence of downside risk," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 69(1), pages 27-58, March.
    • Handle: RePEc:spr:mathme:v:69:y:2009:i:1:p:27-58
    DOI: 10.1007/s00186-008-0228-7
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    References listed on IDEAS

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    1. F. Avram & Z. Palmowski & M. R. Pistorius, 2011. "On Gerber-Shiu functions and optimal dividend distribution for a L\'{e}vy risk process in the presence of a penalty function," Papers 1110.4965, arXiv.org, revised Jun 2015.
    2. Loeffen, R.L., 2009. "An optimal dividends problem with transaction costs for spectrally negative Lévy processes," Insurance: Mathematics and Economics, Elsevier, vol. 45(1), pages 41-48, August.
    3. Loeffen, Ronnie L. & Renaud, Jean-François, 2010. "De Finetti's optimal dividends problem with an affine penalty function at ruin," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 98-108, February.
    4. Martin Hunting & Jostein Paulsen, 2013. "Optimal dividend policies with transaction costs for a class of jump-diffusion processes," Finance and Stochastics, Springer, vol. 17(1), pages 73-106, January.

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    More about this item

    Keywords

    Dividend optimization; Downside risk; Impulse control; Jump diffusion; Optimal stopping; Singular stochastic control; C61; G35;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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