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

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