The Maximality Principle in Singular Control with Absorption and Its Applications to the Dividend Problem

DOI10.1137/22M152791XarXiv2206.11534OpenAlexW4390830590WikidataQ130132518 ScholiaQ130132518MaRDI QIDQ6180251FDOQ6180251

Authors: Tiziano De Angelis, Erik Ekström, Marcus Olofsson 

Publication date: 19 January 2024

Published in: SIAM Journal on Control and Optimization (Search for Journal in Brave)

Abstract: Motivated by a formulation of the classical dividend problem, we develop the maximality principle for singular stochastic control problems with 2-dimensional degenerate dynamics and absorption along the diagonal of the state space. This result is new in the theory of singular control and it unveils deep connections to Peskir's maximality principle in optimal stopping (Ann. Probab. 26, no. 4, 1998). We construct an optimal control as a Skorokhod reflection along a moving barrier. The barrier can be computed analytically as the smallest solution to a certain non-linear ordinary differential equation. Contrarily to the classical 1-dimensional formulation of the dividend problem our framework produces a non-trivial solution when the firm's capital evolves as a geometric Brownian motion. Such solution is also qualitatively different from the one traditionally obtained for the arithmetic Brownian motion.

Full work available at URL: https://arxiv.org/abs/2206.11534

Recommendations

• Maximum Principle for Singular Stochastic Control Problems
• The dividend problem with a finite horizon
• Optimal dividends with partial information and stopping of a degenerate reflecting diffusion
• Optimal dividend policy and growth option
• The general maximum principle for stochastic control problems with singular controls

zbMATH Keywords

free boundary problemsoptimal stoppingmaximality principledividend problemsingular control with absorption

Mathematics Subject Classification ID

Corporate finance (dividends, real options, etc.) (91G50) Free boundary problems for PDEs (35R35) Stopping times; optimal stopping problems; gambling theory (60G40) Optimal stochastic control (93E20)

Cites Work

• Title not available (Why is that?)
• Optimal stopping of the maximum process: The maximality principle
• Controlled diffusion models for optimal dividend pay-out
• Title not available (Why is that?)
• Optimal Consumption for General Diffusions with Absorbing and Reflecting Barriers
• Title not available (Why is that?)
• Stochastic differential equations with reflecting boundary conditions
• Optimization of the flow of dividends
• Title not available (Why is that?)
• Optimal harvesting of stochastically fluctuating populations
• Risk vs. profit potential:
• Diffusions and Elliptic Operators
• Connections between Optimal Stopping and Singular Stochastic Control I. Monotone Follower Problems
• A Model for Reversible Investment Capacity Expansion
• Irreversible investment and industry equilibrium
• Connections between Singular Control and Optimal Switching
• A nonconvex singular stochastic control problem and its related optimal stopping boundaries
• Connections between optimal stopping and singular stochastic control
• The dividend problem with a finite horizon
• Optimal dividends with partial information and stopping of a degenerate reflecting diffusion
• A useful extension of Itô's formula with applications to optimal stopping

This page was built for publication: The Maximality Principle in Singular Control with Absorption and Its Applications to the Dividend Problem

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q6180251)