Optimal Dividend Policy When Cash Surplus Follows The Telegraph Process

Igor Pospelov and Stanislav Radionov
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Igor Pospelov: National Research University Higher School of Economics

HSE Working papers from National Research University Higher School of Economics

Abstract: This article contributes to research dealing with the optimal dividend policy problem of a fi rm whose goal is to maximize the expected total discounted dividend payments before bankruptcy. We consider a model of a firm whose cash surplus exhibits regime switching, but unlike the existing literature, we exclude diffusion from our model. We assume firm's cash surplus follows the telegraph process, which leads to the problem of singular stochastic control. Surprisingly, this problem turns out to be more complicated than the ones arising in the models involving diffusion. We solve this problem using the method of variational inequalities and show that the optimal dividend policy can be of three signi cantly different types depending on the parameters of the model

Keywords: optimal dividend policy; regime switching; telegraph process. (search for similar items in EconPapers)
JEL-codes: C61 G35 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2015
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Published in WP BRP Series: Financial Economics / FE, September 2015, pages - 22

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