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

30 Pages Posted: 22 May 2012 Last revised: 18 Dec 2012

See all articles by Martin Hoesli

Martin Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Aberdeen - Business School

Eva Liljeblom

Swedish School of Economics and Business Administration

Anders Löflund

Hanken School of Economics

Date Written: November 5, 2012

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

JEL Classification: G11, G23, R33

Suggested Citation

Hoesli, Martin Edward Ralph and Liljeblom, Eva and Löflund, Anders, The Effect of Lock-Ups on the Suggested Real Estate Portfolio Weight (November 5, 2012). Swiss Finance Institute Research Paper No. 12-22, Available at SSRN: https://ssrn.com/abstract=2063749 or http://dx.doi.org/10.2139/ssrn.2063749

Martin Edward Ralph Hoesli (Contact Author)

University of Geneva - Geneva School of Economics and Management (GSEM) ( email )

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Swiss Finance Institute

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University of Aberdeen - Business School ( email )

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Eva Liljeblom

Swedish School of Economics and Business Administration ( email )

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+358-9-431 33 393 (Fax)

Anders Löflund

Hanken School of Economics ( email )

PB 287
Helsinki, Vaasa 65101
Finland

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