TITLE:
On Steady Dividend Payment under Functional Mean Reversion Speed
AUTHORS:
Adeline Peter Mtunya, Philip Ngare, Yaw Nkansah-Gyekye
KEYWORDS:
Investment, Dividend Policy, Steady Payment, Functional Mean Reversion Speed, Stochastic Optimal Control
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.6 No.3,
August
2,
2016
ABSTRACT: We study how firms’ management can ensure steady dividend growth and payout to the share-holders in an emerging market. We create the dividend equalization reserve account whereby during high profit some amount of money is kept in order to top up dividends during deficiency. We use a mean reversion stochastic differential equation with a functional mean reversion speed to find the optimal dividend policy with optimal dividend equalization reserve. One of our results indicates that, it is optimal to pay high dividends when we have high mean levels. Also, we realized that a higher level of volatility which implies more dividend can be paid. And high dividend can also be paid as the interest rate rises but this is more significant when the firm makes profits above average. Lastly, we compared the buffer approach to a situation where hedging was not applied and found that the buffering approach is more suitable because it gives shareholders steady dividend payments.