Optimal financing and dividend strategies in a dual model with proportional costs

Dingjun Yao; Hailiang Yang; Rongming Wang

doi:10.3934/jimo.2010.6.761

Article Contents

2010, Volume 6, Issue 4: 761-777. Doi: 10.3934/jimo.2010.6.761

This issue Previous Article Robust solutions to Euclidean facility location problems with uncertain data Next Article Extended canonical duality and conic programming for solving 0-1 quadratic programming problems

Optimal financing and dividend strategies in a dual model with proportional costs

1.
School of Finance, Nanjing University of Finance and Economics, Nanjing, 210046
2.
Department of Statistics and Actuarial Science, The University of Hong Kong, Pokfulam Road, Hong Kong
3.
School of Finance and Statistics, East China Normal University, Shanghai, 200241

Received: July 31, 2009

Revised: March 31, 2010

Published: September 2010

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Abstract

We consider the optimal control problem with dividend payments and issuance of equity in a dual risk model. Such a model might be appropriate for a company that specializes in inventions and discoveries, which pays costs continuously and has occasional profits. Assuming proportional transaction costs, we aim at finding optimal strategy which maximizes the expected present value of the dividends payout minus the discounted costs of issuing new equity before bankruptcy. By adopting some of the techniques and methodologies in L$\phi$kka and Zervos (2008), we construct two categories of suboptimal models, one is the ordinary dual model without issuance of equity, the other one assumes that, by issuing new equity, the company never goes bankrupt. We identify the value functions and the optimal strategies corresponding to the suboptimal models in two different cases. For exponentially distributed jump sizes, closed-form solutions are obtained.

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Mathematics Subject Classification: Primary: 93E20, 49L20 Secondary: 91G80.

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