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27
Optimal bank capital with costly recapitalization
 University of Michigan, Department of
, 2006
"... We study optimal bank capital holdings in a dynamic setting where the bank has access to external capital, but this access is subject to a fixed cost and a delay. Our model indicates that a recapitalization option may be valuable despite substantial fixed costs, and that a significant fraction of th ..."
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Cited by 20 (1 self)
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We study optimal bank capital holdings in a dynamic setting where the bank has access to external capital, but this access is subject to a fixed cost and a delay. Our model indicates that a recapitalization option may be valuable despite substantial fixed costs, and that a significant fraction of the value of low capitalized banks may be attributable to the option to recapitalize. When calibrated to data on actual bank returns, the model yields capital ratios that are significantly lower than actual bank capital ratios. This shortfall is, at least partly, explained by the skewness of the distribution of actual bank returns and by the banks ' accounting options for the provisioning of credit losses. We operate the model with implied bank return volatilities, in the same way as BlackScholes model is used in practice. Analysis of the limiting cases where the capital market imperfections vanish reveals that the capital issue delay rather than the fixed cost determines the qualitative nature of the solution.
On optimality of the barrier strategy in de Finetti’s dividend problem for spectrally negative Lévy processes
, 2007
"... We consider the classical optimal dividend control problem which was proposed by de Finetti [Trans. XVth Internat. Congress Actuaries ..."
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Cited by 16 (5 self)
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We consider the classical optimal dividend control problem which was proposed by de Finetti [Trans. XVth Internat. Congress Actuaries
Controlling Risk Exposure and Dividends Payout Schemes: Insurance Company Example
 Mathematical Finance
, 1998
"... The paper represents a model for the financial valuation of a firm which has control on the dividend payment stream and its risk as well as potential profit by choosing different business activities among those available to it. This is an extension of the classical Miller Modigliani theory of firm v ..."
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Cited by 12 (1 self)
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The paper represents a model for the financial valuation of a firm which has control on the dividend payment stream and its risk as well as potential profit by choosing different business activities among those available to it. This is an extension of the classical Miller Modigliani theory of firm valuation theory to the situation of controllable business activities in stochastic environment. We associate the value of the company with the expected present value of the net dividend distributions (under the optimal policy). The example we consider is a large corporation such as an insurance company, whose liquid assets in the absence of control fluctuate as a Brownian motion with a constant positive drift and a constant diffusion coefficient. We interpret the diffusion coefficient as risk exposure, while drift is understood as potential profit. At each moment of time there is an option to reduce risk exposure, simultaneously reducing the potential profit, like using proportional reinsura...
Optimal Risk/Dividend Distribution Control Models. Applications to Insurance
 Company, Mathematical Methods of Operations Research
, 1999
"... The current paper presents a short survey of stochastic models of risk control and dividend optimization techniques for a financial corporation. While being close to consumption /investment models of Mathematical Finance, dividend optimization models possess special features which do not allow th ..."
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Cited by 11 (2 self)
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The current paper presents a short survey of stochastic models of risk control and dividend optimization techniques for a financial corporation. While being close to consumption /investment models of Mathematical Finance, dividend optimization models possess special features which do not allow them to be treated as a particular case of consumption/investment models.
Optimal Risk Control and Dividend Distribution Policies. Example of Excessof Loss Reinsurance for an Insurance Corporation
 Example of Excessof Loss Reinsurance, Finance and Stochastics
, 1998
"... We consider a model of a financial corporation which has to find an optimal policy balancing its risk and expected profits. The example treated in this paper is related to an insurance company with the risk control method known in the industry as excessofloss reinsurance. Under this scheme the ins ..."
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Cited by 8 (4 self)
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We consider a model of a financial corporation which has to find an optimal policy balancing its risk and expected profits. The example treated in this paper is related to an insurance company with the risk control method known in the industry as excessofloss reinsurance. Under this scheme the insurance company divert part of its premium stream to another company in exchange of an obligation to pick up that amount of each claim which exceeds a certain level a, This reduces the risk but it also reduces the potential profit. The objective is to make a dynamic choice of a and find the dividend distribution policy, which maximizes the cumulative expected discounted dividend payouts. We use diffusion approximation for this optimal control problem. Mathematical it becomes a mixed singularregular control problem for diffusion processes. Its analytical part is related to a free boundary (Stephan) problem for a linear second order differential equation. 1 Introduction The problem of optim...
PreIPO operational and financial decisions
 Management Sci
, 2004
"... Many owners of growing privatelyheld firms make operational and financial decisions in an effort to maximize the expected present value of the proceeds from an Initial Public Offering (IPO). We ask: “What is the right time to make an IPO? ” and “How should operational and financial decisions be coo ..."
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Cited by 4 (1 self)
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Many owners of growing privatelyheld firms make operational and financial decisions in an effort to maximize the expected present value of the proceeds from an Initial Public Offering (IPO). We ask: “What is the right time to make an IPO? ” and “How should operational and financial decisions be coordinated to increase the likelihood of a successful IPO? ” Financial and operational decisions in this problem are linked because adequate financial capital is crucial for operational decisions to be feasible and operational decisions affect the firm’s access to financial resources. The IPO event is treated as a stopping time in an infinitehorizon discounted Markov decision process. Unlike traditional stopping time models, at every stage the model includes other decisions such as production, sales and loan size. The results include (1) characterization of an optimal capacityexpansion policy, (2) sufficient conditions for a monotone threshold rule to yield an optimal IPO decision, and (3) algorithmic implications of results in (1) and (2).
Dynamic Optimal Risk Management and Dividend Policy under Optimal Capital Structure and Maturity
 University of California
, 1997
"... This paper examines the interaction between a firm's volatility and dividend policies and capital structure and maturity policies. The firm is permitted to costlessly and continuously select any asset volatility and dividend yield, within bounds. Simple and intuitive rules are derived for the firm's ..."
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Cited by 3 (0 self)
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This paper examines the interaction between a firm's volatility and dividend policies and capital structure and maturity policies. The firm is permitted to costlessly and continuously select any asset volatility and dividend yield, within bounds. Simple and intuitive rules are derived for the firm's optimal dividend and volatility choices. It is found that the firm always optimally selects either the maximal or minimal dividend yield and asset volatility and that these decisions depend, respectively, only upon the delta and gamma of the firm's equity. These optimal dividend and volatility policies are then implemented within the context of the Leland and Toft (1996) capital structure model. It is found that firms will optimally select a low dividend yield and a low asset volatilityover a greater range of firm asset values the shorter is the maturity of the firm's debt. Anticipating this behavior, bondholders will demand a smaller credit spread for shortterm debt when the firm has great leewayinchoosing its asset volatility. In turn, this may induce a firm to optimally issue shortterm debt. It is also found that the better is a firm's ability to hedge, the more frequently it will refrain from paying dividends. This confirms the wellknown result that risk management mitigates incentives for underinvestment. Here it is shown to apply expost as well as exante.
A Diffusion Model for Optimal Dividend Distribution for a Company with Constraints on Risk Control
, 2000
"... We investigate a model of a corporation which faces constant liability payments and which can choose a production/business policy from an available set of control policies with different expected profits and risks. The objective is to maximize the expected present value of the total dividend dist ..."
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Cited by 3 (0 self)
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We investigate a model of a corporation which faces constant liability payments and which can choose a production/business policy from an available set of control policies with different expected profits and risks. The objective is to maximize the expected present value of the total dividend distributions. The main purpose of this paper is to deal with the impact of constraints on business activities such as inability to completely eliminate risk (even at the expense of reducing the potential profit to zero) or when such a risk cannot exceed a certain level. We analyze the case in which there is no restriction on the dividend payout rates. By delicate analysis on the corresponding HamiltonJacobi Bellman equation we compute explicitly the optimal return function and determine the optimal policy.
Optimal control with absolutely continuous strategies for spectrally negative Lévy processes
 J. Appl. Probab
, 2012
"... Lévy processes ∗ ..."
HOW LONG SHOULD “FOLLOWERS ” DELAY MARKET ENTRY?
, 2004
"... HOW LONG SHOULD “FOLLOWERS ” DELAY MARKET ENTRY? In this article, we theorize on the decision by followers to delay market entry in order to optimize performance. Using a decisiontheoretic approach, we offer three entry timing prescriptions for followers ’ based upon the characteristics of their co ..."
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HOW LONG SHOULD “FOLLOWERS ” DELAY MARKET ENTRY? In this article, we theorize on the decision by followers to delay market entry in order to optimize performance. Using a decisiontheoretic approach, we offer three entry timing prescriptions for followers ’ based upon the characteristics of their complementary assets (relative to pioneers) and the environment being entered. That is, we model how followers ’ optimal delay of market entry can be diminished or augmented based on the complementarity or substitutability of their relative amounts of complementary assets and the relatedness of those assets. Our findings can serve as guidelines for empirical research to probe whether followers ’ market entry should be delayed or expedited.