Marketing Period Risk in a Portfolio Context: Theory and Empirical Estimates from the UK Commercial Real Estate Market
Shaun A. Bond
University of Cincinnati
Sungkyunkwan University - Department of Economics
California State University, Fullerton - Department of Finance
Kerry D. Vandell
University of California, Irvine - Paul Merage School of Business
Journal of Real Estate Finance and Economics, Vol. 34, No. 4, 2007
The role of selling (or marketing) period uncertainty in understanding risk associated with property investment is examined in this paper. Using an approach developed by Lin and Vandell [2001, 2005] and Lin , combined with a statistical model of UK commercial property transactions, we show that the ex ante level of risk exposure for a commercial real estate investor is aroundone and a half times that obtained from historical statistics. The risk related to marketing time uncertainty can be reduced by constructing a portfolio. We find that at least 10 properties are necessary to reduce this risk, assuming independence between marketing period risk and price risk. These findings have important implications for mixed-asset portfolio allocation decisions.
Keywords: liquidity risk, commercial real estate, time on market, transaction process, UK
JEL Classification: R33, G11, G32Accepted Paper Series
Date posted: January 11, 2007
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