Optimal dividends with partial information and stopping of a degenerate reflecting diffusion

DOI10.1007/S00780-019-00407-1MaRDI QIDQ2282963zbMATH OpenOpenAlexWikidataFDO

Authors Tiziano De Angelis

Publication date 27 December 2019

Published in Finance and Stochastics (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/1805.12035

zbMATH Keywords

dividend problemfree boundary problemsoptimal stoppingpartial informationreflected diffusionssingular controlStroock-Williams equation

Mathematics Subject Classification ID

Stopping times; optimal stopping problems; gambling theory (60G40) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Corporate finance (dividends, real options, etc.) (91G50) Optimal stochastic control (93E20)

Abstract: We study the optimal dividend problem for a firm's manager who has partial information on the profitability of the firm. The problem is formulated as one of singular stochastic control with partial information on the drift of the underlying process and with absorption. In the Markovian formulation, we have a 2-dimensional degenerate diffusion, whose first component is singularly controlled and it is absorbed as it hits zero. The free boundary problem (FBP) associated to the value function of the control problem is challenging from the analytical point of view due to the interplay of degeneracy and absorption. We find a probabilistic way to show that the value function of the dividend problem is a smooth solution of the FBP and to construct an optimal dividend strategy. Our approach establishes a new link between multidimensional singular stochastic control problems with absorption and problems of optimal stopping with `creation'. One key feature of the stopping problem is that creation occurs at a state-dependent rate of the `local-time' of an auxiliary 2-dimensional reflecting diffusion.

Review text

This study refers to the optimal dividend problem for a firm's manager who has partial information on the profitability of the firm. The problem is formulated as one of singular stochastic control with partial information on the drift of the underlying process and with absorption. In the Markovian formulation, one has a two-dimensional degenerate diffusion whose first component is singularly controlled; and the process is absorbed when its first component hits zero. The free boundary problem associated to the value function of the control problem is challenging from an analytical point of view due to the interplay of degeneracy and absorption. Yet, the value function of the dividend problem is a smooth solution of the free boundary problem and the author constructs an optimal dividend strategy.

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Cited in

(16)

• Learning about profitability and dynamic cash management
• Nonlinear filtering of partially observed systems arising in singular stochastic optimal control
• Optimal reduction of public debt under partial observation of the economic growth
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• Optimal Ratcheting of Dividends in a Brownian Risk Model
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