Portfolio Selection with Transaction Costs and Jump-Diffusion Asset Dynamics
31 Pages Posted: 31 Oct 2008
Date Written: May 10, 2008
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.
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