Lifetime Investment and Consumption with Recursive Preferences and Small Transaction Costs

Abstract

This article investigates the effects of small proportional transaction costs on lifetime consumption and portfolio decisions. The extant literature has focused on agents with additive utility; here, we argue that this is essentially without loss of generality at the leading order for small costs. To shed light on the effects of alternative risk preferences, we in turn perform a higher-order analysis for the archetype of non-additive preferences – the isoelastic recursive utilities proposed by Epstein and Zin.

Keywords: lifetime investment and consumption, recursive utility, Epstein-Zin, transaction costs, asymptotics

JEL Classification: G11, D91, C61