Optimal dividend distribution under Markov regime switching
Zhengjun Jiang,Martijn Pistorius +1 more
TL;DR: In this article, the authors consider a company whose cumulative net revenues evolve as a Brownian motion with positive drift that is modulated by a finite state Markov chain, and model the discount rate as a deterministic function of the current state of the chain.
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Abstract: We investigate the problem of optimal dividend distribution for a company in the presence of regime shifts. We consider a company whose cumulative net revenues evolve as a Brownian motion with positive drift that is modulated by a finite state Markov chain, and model the discount rate as a deterministic function of the current state of the chain. In this setting, the objective of the company is to maximize the expected cumulative discounted dividend payments until the moment of bankruptcy, which is taken to be the first time that the cash reserves (the cumulative net revenues minus cumulative dividend payments) are zero. We show that if the drift is positive in each state, it is optimal to adopt a barrier strategy at certain positive regime-dependent levels, and provide an explicit characterization of the value function as the fixed point of a contraction. In the case that the drift is small and negative in one state, the optimal strategy takes a different form, which we explicitly identify if there are two regimes. We also provide a numerical illustration of the sensitivities of the optimal barriers and the influence of regime switching.
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Citations
Optimal dividends and capital injection: A general Lévy model with extensions to regime-switching models
Dante Mata López,Kei Noba,José Luis Pérez,Kazutoshi Yamazaki +3 more
Dividend optimization for regime-switching general diffusions
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TL;DR: In this paper, the optimal dividend distribution problem of a financial corporation whose surplus is modeled by a general diffusion process with both the drift and diffusion coefficients depending on the external economic regime as well as the surplus itself through general functions is considered.
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