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

Forthcoming in Quarterly Journal of Finance

46 Pages Posted: 12 Jan 2017

See all articles by Michal Czerwonko

Michal Czerwonko

Concordia University

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business

Date Written: January 10, 2016

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

JEL Classification: G10, G11

Suggested Citation

Czerwonko, Michal and Perrakis, Stylianos, Portfolio Selection with Transaction Costs and Jump-Diffusion Asset Dynamics I: A Numerical Solution (January 10, 2016). Forthcoming in Quarterly Journal of Finance. Available at SSRN: https://ssrn.com/abstract=2897073 or http://dx.doi.org/10.2139/ssrn.2897073

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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