The Effect of Lock-Ups on the Suggested Real Estate Portfolio Weight

Martin Hoesli, Eva Liljeblom and Anders Loflund ()
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Anders Loflund: Hanken School of Economics, Department of Finance and Statistics

International Real Estate Review, 2014, vol. 17, issue 1, 1-22

Abstract: We test relative illiquidity, exemplified through a temporary lock-up, as a partial explanation for the gap between theoretical and empirical weights for real estate in a multi-asset portfolio. Since asset correlations are known to increase in bear markets, which reduce their diversification benefits, the ex-ante knowledge of a lock-up in an asset class that offers diversification benefits in bull markets (Hung et al., 2008) may reduce the optimal weight that an investor wishes to put in it ex-ante. By using dynamic multiperiod portfolio policies by Brandt and Santa-Clara (2006), and introducing a lock-up in line as per de Roon et al. (2009), we study the effects of a partial lock-up on the weight for REITs in a U.S. stock and bond portfolio. We find support for our prediction, in the form of lower weights for the illiquid asset once a lock-up is introduced.

Keywords: Asset Allocation; Illiquidity; Lock-Up; Multi-period Portfolio Optimization; REITs (search for similar items in EconPapers)
JEL-codes: L85 (search for similar items in EconPapers)
Date: 2014
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Working Paper: The Effect of Lock-Ups on the Suggested Real Estate Portfolio Weight (2012)
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