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Department of Applied Finance and Actuarial Studies

Seminar by Dr Bernard Wong

Research Seminars - business and economics
  • Topic: On a mean reverting dividend strategy with Brownian motion
  • Speaker: Dr Bernard Wong, Senior Lecturer of Actuarial Studies, Australian School of Business, University of New South Wales
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In actuarial risk theory, the introduction of dividend pay-outs in surplus models goes back to Brunode Finetti (1957). Dividend strategies that can be found in the literature often yield pay-out patterns that are inconsistent with actual practice. One issue is the high variability of the dividend payment rates over time. We aim at addressing that problem by specifying a dividend strategy that yields stable dividend pay-outs over time.

 In this paper, we model the surplus of a company with a Brownian risk model. Dividends are paid at a constant rate g of the company's modified surplus (after distribution of dividends), which operates as a buffer reservoir to yield a regular flow of shareholders' income. The dividend payment rate reverts around the drift of the original process \mu, whereas the modified surplus itself reverts around the level l=\mu/g.

We determine the distribution of the present value of dividends when the surplus process is never absorbed. After introducing an absorbing barrier a (inferior to the initial surplus) and stating the Laplace transform of the time of absorption, we derive the expected present value of dividends until absorption. The latter is then also determined if dividends are not paid whenever the surplus is too close to the absorbing barrier. We conclude by comparing both barrier and mean reverting dividend strategies.

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