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

Author

Listed:
  • Andrea Barth

    (ETH Zürich
    University of Stuttgart)

  • Santiago Moreno–Bromberg

    (University Zürich)

  • Oleg Reichmann

    (ETH Zürich)

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.

Suggested Citation

  • Andrea Barth & Santiago Moreno–Bromberg & Oleg Reichmann, 2016. "A Non-stationary Model of Dividend Distribution in a Stochastic Interest-Rate Setting," Computational Economics, Springer;Society for Computational Economics, vol. 47(3), pages 447-472, March.
    • Handle: RePEc:kap:compec:v:47:y:2016:i:3:d:10.1007_s10614-015-9502-y
    DOI: 10.1007/s10614-015-9502-y
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    References listed on IDEAS

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    Cited by:

    1. A. Max Reppen & Jean‐Charles Rochet & H. Mete Soner, 2020. "Optimal dividend policies with random profitability," Mathematical Finance, Wiley Blackwell, vol. 30(1), pages 228-259, January.
    2. Klimenko, Nataliya & Moreno-Bromberg, Santiago, 2016. "The shadow costs of repos and bank liability structure," Journal of Economic Dynamics and Control, Elsevier, vol. 65(C), pages 1-29.

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