Optimal ratcheting of dividends in a Brownian risk model

TL;DR

This paper investigates the optimal dividend payout strategy in a Brownian risk model with the constraint that dividend rates cannot decrease, providing explicit solutions and strategies for different admissible rate sets.

Contribution

It extends the ratcheting dividend problem to a Brownian surplus process, deriving explicit strategies and solutions using calculus of variation techniques.

Findings

Threshold strategies are optimal for finitely many dividend rates.

Curve strategies are ε-optimal for a continuum of rates.

Explicit analysis of optimal strategies in the Brownian setting.

Abstract

We study the problem of optimal dividend payout from a surplus process governed by Brownian motion with drift under the additional constraint of ratcheting, i.e. the dividend rate can never decrease. We solve the resulting two-dimensional optimal control problem, identifying the value function to be the unique viscosity solution of the corresponding Hamilton-Jacobi-Bellman equation. For finitely many admissible dividend rates we prove that threshold strategies are optimal, and for any finite continuum of admissible dividend rates we establish the $\varepsilon$-optimality of curve strategies. This work is a counterpart of Albrecher et al. (2020), where the ratcheting problem was studied for a compound Poisson surplus process with drift. In the present Brownian setup, calculus of variation techniques allow to obtain a much more explicit analysis and description of the optimal dividend strategies. We also give some numerical illustrations of the optimality results.