Portfolio Selection with Transaction Costs and Jump-Diffusion Asset Dynamics

31 Pages Posted: 31 Oct 2008

See all articles by Michal Czerwonko

Michal Czerwonko

Concordia University

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business

Date Written: May 10, 2008

Abstract

We derive the boundaries of the region of no transaction when the risky asset follows a mixed jump-diffusion process in the presence of proportional transaction costs. These boundaries are shown to differ from their diffusion counterparts in relation to the jump intensity for lognormally distributed jump size. A general numerical approach is presented for iid risky asset returns in discrete time. An error in earlier work on the region of no transaction for discretized diffusions is demonstrated and corrected results are presented. Comparative results with a recent study on the same topic are presented and it is shown that the numerical algorithm has equally attractive approximation properties to the unknown continuous time limit.

Suggested Citation

Czerwonko, Michal and Perrakis, Stylianos, Portfolio Selection with Transaction Costs and Jump-Diffusion Asset Dynamics (May 10, 2008). Available at SSRN: https://ssrn.com/abstract=1290424 or http://dx.doi.org/10.2139/ssrn.1290424

Michal Czerwonko (Contact Author)

Concordia University ( email )

1455 De Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

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