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 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 commonly applied stock price model and dividend specification. The practical implications are discussed and a tractable pricing framework is presented. Finally, the generic setup is applied to a defaultable Markov diffusion model in order to highlight the impact of different dividend specifications.      «

Based on the general idea of considering the stock price as the sum over all future expected discounted dividends, a 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 commonly applied stock price model and dividend specification. The practical implications are discussed and a tractable pricing framework is presented. Fina...     »