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

DOI10.1137/22M152791XMaRDI QIDQ6180251zbMATH OpenOpenAlexWikidataFDO

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)

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

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)

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.

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