Created by Dr. German Bernhart,Dr. Jan-Frederik Mai


Consistent modeling of discrete cash dividends

Based on the general idea of considering the stock price as the sum over all future expected discounted dividends, a very flexible approach for the modeling of discrete cash dividends is developed. From a theoretical perspective, such a viewpoint automatically implies an arbitrage-free modeling approach and allows for embedding almost any kind of stochastic process and dividend speci fication. The practical implications are discussed and a tractable pricing framework is presented. Finally, the generic framework is applied to the setup of a defaultable Markov di ffusion to highlight the impact of diff erent dividend speci fications.

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