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
Date Written: January 10, 2016
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: Suggested Citation