IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v23y2020i07ns0219024920500442.html
   My bibliography  Save this article

Linear Stochastic Dividend Model

Author

Listed:
  • SANDER WILLEMS

    (EPFL and Swiss Finance Institute, Switzerland)

Abstract

In this paper, we propose a new model for pricing stock and dividend derivatives. We jointly specify dynamics for the stock price and the dividend rate such that the stock price is positive and the dividend rate nonnegative. In its simplest form, the model features a dividend rate that is mean-reverting around a constant fraction of the stock price. The advantage of directly specifying dynamics for the dividend rate, as opposed to the more common approach of modeling the dividend yield, is that it is easier to keep the distribution of cumulative dividends tractable. The model is nonaffine but does belong to the more general class of polynomial processes, which allows us to compute all conditional moments of the stock price and the cumulative dividends explicitly. In particular, we have closed-form expressions for the prices of stock and dividend futures. Prices of stock and dividend options are accurately approximated using a moment matching technique based on the principle of maximal entropy.

Suggested Citation

  • Sander Willems, 2020. "Linear Stochastic Dividend Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(07), pages 1-20, November.
    • Handle: RePEc:wsi:ijtafx:v:23:y:2020:i:07:n:s0219024920500442
    DOI: 10.1142/S0219024920500442
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024920500442
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024920500442?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:23:y:2020:i:07:n:s0219024920500442. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.