Optimal dividend policies for a class of growth-restricted diffusion processes under transaction costs and solvency constraints

TY - JOUR

T1 - Optimal dividend policies for a class of growth-restricted diffusion processes under transaction costs and solvency constraints

AU - Bai, Lihua

AU - Hunting, Martin

AU - Paulsen, Jostein

PY - 2012/7

Y1 - 2012/7

N2 - In this paper, we consider a company whose surplus follows a rather general diffusion process and whose objective is to maximize expected discounted dividend payments. With each dividend payment, there are transaction costs and taxes, and it is shown in Paulsen (Adv. Appl. Probab. 39:669-689, 2007) that under some reasonable assumptions, optimality is achieved by using a lump sum dividend barrier strategy, i. e., there is an upper barrier ū* and a lower barrier u* so that whenever the surplus reaches ū*, it is reduced to ū* through a dividend payment. However, these optimal barriers may be unacceptably low from a solvency point of view. It is argued that, in that case, one should still look for a barrier strategy, but with barriers that satisfy a given constraint. We propose a solvency constraint similar to that in Paulsen (Finance Stoch. 4:457-474, 2003); whenever dividends are paid out, the probability of ruin within a fixed time T and with the same strategy in the future should not exceed a predetermined level ε. It is shown how optimality can be achieved under this constraint, and numerical examples are given.

AB - In this paper, we consider a company whose surplus follows a rather general diffusion process and whose objective is to maximize expected discounted dividend payments. With each dividend payment, there are transaction costs and taxes, and it is shown in Paulsen (Adv. Appl. Probab. 39:669-689, 2007) that under some reasonable assumptions, optimality is achieved by using a lump sum dividend barrier strategy, i. e., there is an upper barrier ū* and a lower barrier u* so that whenever the surplus reaches ū*, it is reduced to ū* through a dividend payment. However, these optimal barriers may be unacceptably low from a solvency point of view. It is argued that, in that case, one should still look for a barrier strategy, but with barriers that satisfy a given constraint. We propose a solvency constraint similar to that in Paulsen (Finance Stoch. 4:457-474, 2003); whenever dividends are paid out, the probability of ruin within a fixed time T and with the same strategy in the future should not exceed a predetermined level ε. It is shown how optimality can be achieved under this constraint, and numerical examples are given.

M3 - Journal article

SN - 0949-2984

VL - 16

SP - 477

EP - 511

JO - Finance and Stochastics

JF - Finance and Stochastics

IS - 3

ER -