An Exponential Cox-Ingersoll-Ross Process as Discounting Factor

Abstract

We consider an economic agent (a household or an insurance company) modelling its surplus process by a deterministic process or by a Brownian motion with drift. The goal is to maximise the expected discounted spendings/dividend payments, given that the discounting factor is given by an exponential CIR process. In the deterministic case, we are able to find explicit expressions for the optimal strategy and the value function. For the Brownian motion case, we offer a method allowing to show that for a small volatility the optimal strategy is a constant-barrier strategy.