A Non-stationary Model of Dividend Distribution in a Stochastic Interest-Rate Setting

Andrea Barth (), Santiago Moreno–Bromberg () and Oleg Reichmann
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Andrea Barth: ETH Zürich
Santiago Moreno–Bromberg: University Zürich

Computational Economics, 2016, vol. 47, issue 3, No 6, 447-472

Abstract: Abstract In this paper the solutions to several variants of the so-called dividend-distribution problem in a multi-dimensional, diffusion setting are studied. In a nutshell, the manager of a firm must balance the retention of earnings (so as to ward off bankruptcy and earn interest) and the distribution of dividends (so as to please the shareholders). A dynamic-programming approach is used, where the state variables are the current levels of cash reserves and of the stochastic short-rate, as well as time. This results in a family of Hamilton–Jacobi–Bellman variational inequalities whose solutions must be approximated numerically. To do so, a finite element approximation and a time-marching scheme are employed.

Keywords: Dividend distribution; Singular stochastic control; Numerical methods for partial differential equations; Finite element method; 91G10; 91G30; 91G80 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10614-015-9502-y

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