Optimal Time to Sell in Real Estate Portfolio Management

Fabrice Barthélémy () and Jean-Luc Prigent

No 2008-13, THEMA Working Papers from THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise

Abstract: This paper examines the properties of optimal times to sell a diversified real estate portfolio. The portfolio value is supposed to be the sum of the discounted free cash flows and the discounted terminal value (the discounted selling price). According to Baroni et al. (2007b), we assume that the terminal value corresponds to the real estate index. The optimization problem corresponds to the maximization of a quasi-linear utility function. We consider three cases. The first one assumes that the investor knows the probability distribution of the real estate index. However, at the initial time, he has to choose one deterministic optimal time to sell. The second one considers an investor who is perfectly informed about the market dynamics. Whatever the random event that generates the path, he knows the entire path from the beginning. Then, given the realization of the random variable, the path is deterministic for this investor. Therefore, at the initial time, he can determine the optimal time to sell for each path of the index. Finally, the last case is devoted to the analysis of the intertemporal optimization, based on the American option approach. We compute the optimal solution for each of these three cases and compare their properties. The comparison is also made with the buy-and-hold strategy.

Keywords: Real estate portfolio; Optimal holding period; American option. (search for similar items in EconPapers)
JEL-codes: C61 G11 R21 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Optimal Time to Sell in Real Estate Portfolio Management (2009)
Working Paper: Optimal Time to Sell in Real Estate Portfolio Management (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2008-13

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