Portfolio Selection with Transaction Costs and Jump-Diffusion Asset Dynamics I: A Numerical Solution

Michal Czerwonko and Stylianos Perrakis ()
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Michal Czerwonko: John Molson School of Business, Concordia University, 1450 Rue Guy, Montréal, QC H3H 0A1, Canada

Quarterly Journal of Finance (QJF), 2016, vol. 06, issue 04, 1-23

Abstract: We derive allocation rules under isoelastic utility for a mixed jump-diffusion process in a two-asset portfolio selection problem with finite horizon in the presence of proportional transaction costs. We adopt a discrete-time formulation, let the number of periods go to infinity, and show that it converges efficiently to the continuous-time solution for the cases where this solution is known. We then apply this discretization to derive numerically the boundaries of the region of no transactions. Our discrete-time numerical approach outperforms alternative continuous-time approximations of the problem.

Keywords: Transaction costs; portfolio selection; jump diffusion; asset allocation; finite horizon (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S201013921650018X

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