Finite-time dividend-ruin models

Kwai Sun Leung, Yue Kuen Kwok and Seng Yuen Leung

Insurance: Mathematics and Economics, 2008, vol. 42, issue 1, 154-162

Abstract: We consider the finite-time horizon dividend-ruin model where the firm pays out dividends to its shareholders according to a dividend-barrier strategy and becomes ruined when the firm's asset value falls below the default threshold. The asset value process is modeled as a restricted Geometric Brownian process with an upper reflecting (dividend) barrier and a lower absorbing (ruin) barrier. Analytical solutions to the value function of the restricted asset value process are provided. We also solve for the survival probability and the expected present value of future dividend payouts over a given time horizon. The sensitivities of the firm asset value and dividend payouts to the dividend barrier, volatility of the firm asset value and firm's credit quality are also examined.

Date: 2008
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