The Effect of Small Intervention Costs on the Optimal Extraction of Dividends and Renewable Resources in a Jump-Diffusion Model

Nils Chr. Framstad

Memo 25/2014

 

A risk-neutral agent optimizes extraction of dividends or renewable natural resources modelled by a jump-diffusion stock process, where the optimal strategy is characterized as the minimal intervention required to keep the stock process inside a given region. The introduction of a small fixed cost  per intervention, is shown to induce a loss at worst of order ϰ, corresponding to a minimal intervention size of order ϰ, under suitable conditions; there are degenerate cases if purely discontinuous harvesting is optimal for the frictionless problem. If extraction is reversible, at cost between half and twice the extraction cost, the exponents are 1/2 and 1/4, agreeing with the effect of fixed costs in a consumption–portfolio optimization problem for a risk-averse agent.

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Published Nov. 27, 2014 2:24 PM - Last modified Mar. 26, 2015 2:45 PM