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    Real investment and dividend policy in a dynamic stochastic general equilibrium (DSGE) model. Corporate finance at an aggregate level through DSGE models.

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    Publication date
    2012-06-15
    Author
    Huang, Shih-Yun
    Supervisor
    Freeman, Mark C.
    Keyword
    Aggregate dividend policy
    Dynamic Stochastic General Equilibrium (DSGE)
    Real business cycle
    Utility function
    Habits
    Dividends
    Investment
    Rights
    Creative Commons License
    The University of Bradford theses are licenced under a Creative Commons Licence.
    Institution
    University of Bradford
    Department
    School of Management
    Awarded
    2010
    
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    Abstract
    In this thesis, I take a theoretical dynamic stochastic general equilibrium (DSGE) approach to investigate optimal aggregate dividend policy. I make the following contribution: 1. I extend the standard DSGE model to incorporate a residual dividend policy, external financing and default and find that simulated optimal aggregate payouts are much more volatile than the observed data when other variables are close to the values observed in the data. 2. I examine the sensitivity of optimal aggregate dividend policy to the level of the representative agent¿s habit motive. My results show that, when the habit motive gets stronger, the volatility of optimal aggregate payouts increases while the volatility of aggregate consumption decreases. This is consistent with the hypothesis that investors use cash payouts from well diversified portfolios to help smooth consumption. 3. I demonstrate that the variability of optimal aggregate payouts is sensitive to capital adjustment costs. My simulated results show that costly frictions from changing the capital base of the firm cause optimal aggregate dividends and real investments to be smooth and share prices to be volatile. This finding is consistent with prior empirical observations. 4. I run simulations that support the hypothesis that optimal aggregate dividend policy is similar when the representative firm is risk averse to when it has capital adjustment costs. In both cases, optimal aggregate dividends volatility is very low. 5. In all calibrated DSGE models, apart from case 4, optimal aggregate payouts are found to be countercyclical. This supports the hypothesis that corporations prefer to hold more free cash flows for potential investment opportunities instead of paying dividends when the economy is booming, but is inconsistent with observed data. Keywords: Dynamic Stochastic General Equilibrium (DSGE), real business cycle, utility function, habits, dividends
    URI
    http://hdl.handle.net/10454/5440
    Type
    Thesis
    Qualification name
    PhD
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    Theses

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