Optimal asset control of the diffusion model under consideration of the time value of ruin

Document Type: Research Paper

Authors

1 Guangxi University

2 Guangxi University of Finance and Economics

Abstract

‎In this paper‎, ‎we consider the optimal asset control of a financial company which can control its liquid reserves by paying dividends and by issuing new equity‎. ‎We assume that the liquid surplus of the company in the absence of control is modeled by the diffusion model‎. ‎It is a hot topic to maximize the expected present value of dividends payout minus equity issuance until the time of bankruptcy‎. ‎We study this problem under consideration of the time value of ruin‎. ‎By constructing two categories of suboptimal models‎, one with classical model without equity issuance, and the other which never goes bankrupt by equity issuance,‎ ‎the optimal problem is addressed‎. ‎At the end‎, ‎some numerical examples and interesting economic interpretations are presented‎.

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Volume 41, Issue 1
January and February 2015
Pages 141-158
  • Receive Date: 03 March 2013
  • Revise Date: 11 December 2013
  • Accept Date: 25 December 2013