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

Wang Rongming; Yang Hailiang; Yao Dingjun

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

Wang Rongming 1 * #,Yang Hailiang 2,Yao Dingjun 1

1.School of Finance and Statistics, East China Normal University

2.School of Mathematics and System Sciences,The University of Hongkong

*Correspondence author

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Funding: 教育部博士点基金,国家自然科学基金,国家重点基础研究发展计划(973计划) ,香港特别行政区研究基金项目（No.20060269016,10671072,2007CB814904,）

Opened online:14 October 2009

Accepted by: none

Citation: Wang Rongming,Yang Hailiang,Yao Dingjun.Optimal financing and dividend strategies in a dual model with proportional costs[OL]. [14 October 2009] http://en.paper.edu.cn/en_releasepaper/content/35805

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.

Keywords:Dual model;Asset control;Dividend payment;Equity issuance;Optimal control strategy;Value function

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