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

, , und . COMPUTATIONAL ECONOMICS 47 (3): 447-472 (März 2016)


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.

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