Transaction costs and predictability: some utility cost calculations

We examine the loss in utility for a consumer who ignores any or all of the following: (1) the multi-period nature of the consumer's portfolio-choice problem, (2) the empirically documented predictability of asset returns, or (3) transaction costs. Both the costs of behaving myopically and ignoring predictability can be substantial, although allowing for intermediate consumption reduces these costs. Ignoring realistic transaction costs fixed and proportional) imposes significant utility costs that range from 0.8% up to 16.9% of wealth. For the scenarios that we consider, the presence of transaction costs always increases the utility cost of behaving myopically, but decreases the utility cost of ignoring predictability. (C) 1999 Elsevier Science S.A. All rights reserved. JEL classification: G11; G12.