## Controlling Risk Exposure and Dividends Pay-out Schemes: Insurance Company Example (1998)

Venue: | Mathematical Finance |

Citations: | 12 - 1 self |

### BibTeX

@ARTICLE{Højgaard98controllingrisk,

author = {Bjarne Højgaard and Michael Taksar},

title = {Controlling Risk Exposure and Dividends Pay-out Schemes: Insurance Company Example},

journal = {Mathematical Finance},

year = {1998},

volume = {9},

pages = {153--182}

}

### OpenURL

### Abstract

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...