Abstract, Classic, and Explicit Turnpikes
34 Pages Posted: 18 Mar 2011 Last revised: 9 Feb 2012
Date Written: March 12, 2011
Portfolio turnpikes state that, as the investment horizon increases, optimal portfolios for generic utilities converge to those of isoelastic utilities. This paper proves three kinds of turnpikes. In a general semimartingale setting, the abstract turnpike states that optimal final payoffs and portfolios converge under their myopic probabilities. In diffusion models with several assets and a single state variable, the classic turnpike demonstrates that optimal portfolios converge under the physical probability; meanwhile the explicit turnpike identifies the limit of finite-horizon optimal portfolios as a long-run myopic portfolio defined in terms of the solution of an ergodic HJB equation.
Keywords: Portfolio Choice, Incomplete Markets, Long-Run, Utility Functions, Turnpikes
JEL Classification: G11
Suggested Citation: Suggested Citation