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Optimal Dividend Control in Presence of Downside Risk

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Author Info
Luis H. R. Alvarez () (Department of Economics, Turku School of Economics)
Teppo A. Rakkolainen () (Department of Economics, Turku School of Economics)
Abstract

We analyze the determination of a value maximizing dividend policy for a broad class of cash flow processes modelled as spectrally negative jump diffusions. We extend previous results based on continuous diffusion models and characterize the value of the optimal dividend policy explicitly. Utilizing this result, we also characterize explicitly the values as well as the optimal dividend thresholds for a class of associated optimal stopping and sequential impulse control problems. Our results indicate that both the value as well as the marginal value of the optimal policy are increasing functions of policy flexibility in the discontinuous setting as well.

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File URL: http://www.ace-economics.fi/kuvat/ACE14%20valmis.pdf
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Publisher Info
Paper provided by Aboa Centre for Economics in its series Discussion Papers with number 14.

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Length: 40
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:tkk:dpaper:dp14

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Related research
Keywords: dividend optimization; downside risk; impulse control; jump diffusion; optimal stopping; singular stochastic control;

Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

References listed on IDEAS
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  1. Bar-Ilan, Avner & Perry, David & Stadje, Wolfgang, 2004. "A generalized impulse control model of cash management," Journal of Economic Dynamics and Control, Elsevier, vol. 28(6), pages 1013-1033, March. [Downloadable!] (restricted)
  2. Luis Alvarez & Jukka Virtanen, 2006. "A class of solvable stochastic dividend optimization problems: on the general impact of flexibility on valuation," Economic Theory, Springer, vol. 28(2), pages 373-398, 06. [Downloadable!] (restricted)
  3. Perry, David & Stadje, Wolfgang, 2000. "Risk analysis for a stochastic cash management model with two types of customers," Insurance: Mathematics and Economics, Elsevier, vol. 26(1), pages 25-36, February. [Downloadable!] (restricted)
  4. Darrell Duffie & Jun Pan & Kenneth Singleton, 2000. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," Econometrica, Econometric Society, vol. 68(6), pages 1343-1376, November.
  5. Luis Alvarez, 1996. "Demand uncertainty and the value of supply opportunities," Journal of Economics, Springer, vol. 64(2), pages 163-175, June. [Downloadable!] (restricted)
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