Optimal dividend strategy with transaction costs for an upward jump model 
 
Authors:  Ming Zhou 
 
Institution:  China Institute for Actuarial Science , Central University of Finance and Economics , 39 South College Road, Haidian , Beijing , 100081 , P.R. China 
 
Abstract:  In this paper, we consider the optimal dividend problem with transaction costs when the incomes of a company can be described by an upward jump model. Both fixed and proportional costs are considered in the problem. The value function is defined as the expected total discounted dividends up to the time of ruin. Although the same problem has already been studied in the pure diffusion model and the spectrally negative Lévy process, the optimal dividend problem in an upward jump model has two different aspects in determining the optimal dividends barrier and in the property of the value function. First, the value function is twice continuous differentiable in the diffusion case, but it is not in the jump model. Second, under the spectrally negative Lévy process, downward jumps will not cause any payment actions; however, it might trigger dividend payments when there are upward jumps. In deriving the optimal barriers, we show that the value function is bounded by a linear function. Using this property, we establish the verification theorem for the value function. By solving the quasivariational inequalities associated with this problem, we obtain the closedform solution to the value function and hence the optimal dividend strategy when the income sizes follow a common exponential distribution. In the presence of a fixed transaction cost, it is shown that the optimal strategy is a twobarrier policy, and the optimal barriers are only dependent on the fixed cost and not the proportional cost. A numerical example is used to illustrate how the fixed cost plays a significant role in the optimal dividend strategy and also the value function. Moreover, an increased fixed cost results in larger but less frequent dividend payments. 
 
Keywords:  Upward jump model Optimal dividend Transaction costs Stochastic jumps Mathematical finance Impulsive control 

