Abstract

http://ssrn.com/abstract=1946500
 
 

References (36)



 
 

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Locked Up by a Lockup: Valuing Liquidity as a Real Option


Andrew Ang


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Nicolas P. B. Bollen


Vanderbilt University - Finance

2010

Financial Management, Vol. 39, No. 3, pp. 1069-1096, November 2008

Abstract:     
Hedge funds often impose lockups and notice periods to limit the ability of investors to withdraw capital. We model the investor’s decision to withdraw capital as a real option and treat lockups and notice periods as exercise restrictions. Our methodology incorporates time-varying probabilities of hedge fund failure and optimal early exercise. We estimate a two-year lockup with a three-month notice period costs approximately 1% of the initial investment for an investor with constant relative risk aversion utility and risk aversion of three. The cost of illiquidity can easily exceed 10% if the hedge fund manager can arbitrarily suspend withdrawals.

Number of Pages in PDF File: 49

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Date posted: October 21, 2011  

Suggested Citation

Ang, Andrew and Bollen, Nicolas P. B., Locked Up by a Lockup: Valuing Liquidity as a Real Option (2010). Financial Management, Vol. 39, No. 3, pp. 1069-1096, November 2008 . Available at SSRN: http://ssrn.com/abstract=1946500

Contact Information

Andrew Ang (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Nicolas P.B. Bollen
Vanderbilt University - Finance ( email )
401 21st Avenue South
Nashville, TN 37203
United States
HOME PAGE: http://mba.vanderbilt.edu/faculty/nbollen.cfm

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