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Optimal payout policy in presence of downside risk

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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.

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Authors and Affiliations

  1. Department of Economics, Turku School of Economics, 20500, Turku, Finland

    Luis H. R. Alvarez & Teppo A. Rakkolainen

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  1. Luis H. R. Alvarez
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  2. Teppo A. Rakkolainen
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Correspondence to Teppo A. Rakkolainen.

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Alvarez, L.H.R., Rakkolainen, T.A. Optimal payout policy in presence of downside risk. Math Meth Oper Res 69, 27–58 (2009). https://doi.org/10.1007/s00186-008-0228-7

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