In this paper we develop a framework for optimal investment decisions for insurance companies under unhedgeable risk. The perspective that we choose is from an insurance company that tries to maximise the stream of dividends paid to its shareholders. The policy instruments that the company has are the dividend policy and the investment policy. The insurance company can continue to pay dividends...

Using more than 112,000 firm-year observations in 33 countries, we find that two Hofstede’s cultural dimensions, uncertainty avoidance and long-term orientation, remain significant in the determination of dividend policy even after controlling for governance and firm-specific factors. When uncertainty avoidance is high, only firms in countries with stronger investor protection pay more dividend...

This paper investigates the relationship between real earnings growth, real dividend growth, the dividend payout ratio and real stock returns in the US and UK between 1900-2001. We find a positive relationship in the UK between the payout ratio and subsequent real earnings growth contrary to conventional theory, though consistent with the US evidence presented by Arnott and Asness (2003). By co...

State-space or latent-variable models for stock prices specify a process for expected returns and expected and unexpected dividend growth, and then derive dividend yields and returns from a present value relations. They are a useful structure for understanding and interpreting forecasting relations. In this note, I connect state-space representations with their observable counterparts, and VAR/...

This paper presents a numerical scheme that avoids iterations to solve the nonlinear partial differential equation system for pricing American puts with constant dividend yields. Upon applying a frontfixing technique to the Black-Scholes partial differential equation, a predictor-corrector finite difference scheme is proposed to numerically solve the discrete nonlinear scheme. In the comparison...

We consider a class of Markovian risk models in which the insurer collects premiums at rate c1 (c2) whenever the surplus level is below (above) a constant barrier level b. We derive the Laplace­Stieltjes transform (LST) of the distribution of the time to ruin as well as the LST (with respect to time) of the joint distribution of the time to ruin, the surplus prior to ruin, and the deficit at ru...

Dividend smoothing remains a puzzle for …nancial economists. We present a model in which smoothing of dividends arises as an equilibrium outcome. A manager who cares about the intrinsic value of the …rm as well as its current stock price has to decide how to allocate earnings between investments and dividends. Since the stock price is determined by uninformed investors, the manager has an incen...

I document that dividend growth and consumption growth comove procyclically. This new stylized fact empirically resolves the “Duffee Puzzle”—stock returns and consumption growth covary procyclically (Duffee, 2005)—but contradicts extant theoretical assumptions in asset pricing models. I then design a new data generating process (DGP) for the joint consumption-dividend dynamics which fits the pr...

We study an optimal dividend problem under a bankruptcy constraint. Firms face a trade-off between potential bankruptcy and extraction of profits. In contrast to previous works, general cash flow drifts, including Ornstein–Uhlenbeck and CIR processes, are considered. We provide rigorous proofs of continuity of the value function, whence dynamic programming, as well as uniqueness of the solution...