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

Martin Hoesli, Eva Liljeblom and Anders Löflund
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Anders Löflund: Hanken School of Economics

No 12-22, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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, reducing their diversification benefits, the ex ante knowledge of a lock-up in an asset class offering diversification benefits in bull markets (Hung et al., 2008) may reduce the optimal weight an investor wishes to put in it ex ante. Using the dynamic multiperiod portfolio policies by Brandt and Santa-Clara (2006), and introducing a lock-up in line with 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 policy; REITs (search for similar items in EconPapers)
JEL-codes: G11 G23 R33 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2012-05
New Economics Papers: this item is included in nep-ure
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Journal Article: The Effect of Lock-Ups on the Suggested Real Estate Portfolio Weight (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1222

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