Online Appendix: Portfolio Selection with Transaction Costs and Jump Diffusion Asset Dynamics I and II

2016 ◽  
Author(s):  
Michal Czerwonko ◽  
Stylianos Perrakis
Keyword(s):  
Transaction Costs ◽  
Portfolio Selection ◽  
Jump Diffusion ◽  
Online Appendix

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

2016 ◽  
Vol 06 (04) ◽  
pp. 1650018 ◽  
Author(s):  
Michal Czerwonko ◽  
Stylianos Perrakis
Keyword(s):  
Diffusion Process ◽  
Transaction Costs ◽  
Portfolio Selection ◽  
Discrete Time ◽  
Continuous Time ◽  
Jump Diffusion ◽  
Numerical Approach ◽  
Proportional Transaction Costs ◽  
Asset Portfolio ◽  
Time Formulation

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.

Portfolio Selection with Transaction Costs and Jump-Diffusion Asset Dynamics II: Economic Implications

2016 ◽  
Vol 06 (04) ◽  
pp. 1650019 ◽  
Author(s):  
Michal Czerwonko ◽  
Stylianos Perrakis
Keyword(s):  
Transaction Costs ◽  
Portfolio Selection ◽  
Jump Diffusion ◽  
Proportional Transaction Costs ◽  
Economic Implications ◽  
Pure Diffusion ◽  
Asset Portfolio ◽  
Portfolio Restructuring ◽  
Riskless Asset ◽  
Parameter Values

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 allow cash dividends on the risky asset. The allocation shifts toward the riskless asset relative to diffusion in varying degrees depending on parameter values. It is sensitive to the proportion of the jump component to total volatility, but also to the expected amplitude for a given proportion. The shift becomes small when the relative risk aversion increases, but it becomes major when the solvency constraint is active in the presence of jumps. We derive utility losses and risk premia due to jumps under realistic parameter values, and show that even when the no transaction region is very similar between pure diffusion and the mixed process the latter corresponds to lower utility because of higher portfolio restructuring costs.

scholarly journals Online Portfolio Selection with Cardinality Constraint and Transaction Costs based on Contextual Bandit

2020 ◽  
Author(s):  
Mengying Zhu ◽  
Xiaolin Zheng ◽  
Yan Wang ◽  
Qianqiao Liang ◽  
Wenfang Zhang
Keyword(s):  
Financial Markets ◽  
Transaction Costs ◽  
Portfolio Selection ◽  
Financial Engineering ◽  
Side Information ◽  
Cardinality Constraint ◽  
Real World Datasets ◽  
Online Portfolio ◽  
Online Portfolio Selection ◽  
Practical Constraints

Online portfolio selection (OLPS) is a fundamental and challenging problem in financial engineering, which faces two practical constraints during the real trading, i.e., cardinality constraint and non-zero transaction costs. In order to achieve greater feasibility in financial markets, in this paper, we propose a novel online portfolio selection method named LExp4.TCGP with theoretical guarantee of sublinear regret to address the OLPS problem with the two constraints. In addition, we incorporate side information into our method based on contextual bandit, which further improves the effectiveness of our method. Extensive experiments conducted on four representative real-world datasets demonstrate that our method significantly outperforms the state-of-the-art methods when cardinality constraint and non-zero transaction costs co-exist.

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