Optimizing venture capital investments in a jump diffusion model

DOI10.1007/S00186-007-0181-XzbMATH Open1151.91049arXivmath/0703823OpenAlexW1969773313MaRDI QIDQ2482689FDOQ2482689

Authors: Erhan Bayraktar, Masahiko Egami 

Publication date: 23 April 2008

Published in: Mathematical Methods of Operations Research (Search for Journal in Brave)

Abstract: We study a practical optimization problems for venture capital investments and/or Research and Development (R&D) investments. The first problem is that, given the amount of the initial investment and the reward function at the initial public offering (IPO) market, the venture capitalist wants to maximize overall discounted cash flows after subtracting subsequent (if needed) investments. We describe this problem as a mixture of singular stochastic control and optimal stopping problems and give an explicit solution. The former corresponds to finding an optimal subsequent investment policy for the purpose that the value of the investee company stays away from zero. The latter corresponds to finding an optimal stopping rule in order to maximize the harvest of their investments. The second kind problem is concerned about optimal dividend policy. Rather than selling the holding stock, the investor may extract dividends when it is appropriate. We will find a quasi-explicit optimal solution to this problem and prove the existence and uniqueness of the solution and the optimality of the proposed strategy.

Full work available at URL: https://arxiv.org/abs/math/0703823

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zbMATH Keywords

jump diffusionsoptimal stoppingR\&Dstochastic controlsingular controlimpulse controlIPOventure capital investments

Mathematics Subject Classification ID

Corporate finance (dividends, real options, etc.) (91G50) Impulsive optimal control problems (49N25) Stopping times; optimal stopping problems; gambling theory (60G40)

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Cited In (45)

• The perturbed dual risk model with constant interest and a threshold dividend strategy
• The optimal multistage effort and contract of VC's joint investment
• Optimal dividend problems for a jump-diffusion model with capital injections and proportional transaction costs
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