Classical and singular stochastic control for the optimal dividend policy when there is regime switching
Motivated 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.
If 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.
References listed on IDEAS
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.:
- Stéphane Villeneuve & Jean-Paul Descamps, 2007.
"Optimal Dividend Policy and Growth Option,"
- 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.
- Xin Guo & Jianjun Miao & Erwan Morellec, 2002.
"Irreversible Investment with Regime Shifts,"
FAME Research Paper Series
rp99, International Center for Financial Asset Management and Engineering.
- 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 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.
- Reinhard, Jean-Marie, 1984. "On a Class of Semi-Markov Risk Models Obtained as Classical Risk Models in a Markovian Environment," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 14(01), pages 23-43, April.
- 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.
- 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, Søren & Frey, Andreas & Rolski, Tomasz & Schmidt, Volker, 1995. "Does Markov-Modulation Increase the Risk?," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 25(01), pages 49-66, May.
- Bauerle, Nicole, 1996. "Some results about the expected ruin time in Markov-modulated risk models," Insurance: Mathematics and Economics, Elsevier, vol. 18(2), pages 119-127, July.
- Abel Cadenillas & Tahir Choulli & Michael Taksar & Lei Zhang, 2006. "Classical And Impulse Stochastic Control For The Optimization Of The Dividend And Risk Policies Of An Insurance Firm," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 181-202.
- 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.
- 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.
- 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.
- Abel Cadenillas & Sudipto Sarkar & Fernando Zapatero, 2007. "Optimal Dividend Policy With Mean-Reverting Cash Reservoir," Mathematical Finance, Wiley Blackwell, vol. 17(1), pages 81-109.
- 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.
- Luz Rocío Sotomayor & Abel Cadenillas, 2009. "Explicit Solutions Of Consumption-Investment Problems In Financial Markets With Regime Switching," Mathematical Finance, Wiley Blackwell, vol. 19(2), pages 251-279.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:48:y:2011:i:3:p:344-354. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.