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

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Author Info

  • Martin Hoesli

    ()
    (University of Geneva and University of Aberdeen)

  • Eva Liljeblom

    ()
    (Hanken School of Economics, Department of Finance and Statistics)

  • Anders Loflund

    ()
    (Hanken School of Economics, Department of Finance and Statistics)

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, which reduce their diversification benefits, the ex-ante knowledge of a lock-up in an asset class that offers diversification benefits in bull markets (Hung et al., 2008) may reduce the optimal weight that an investor wishes to put in it ex-ante. By using dynamic multiperiod portfolio policies by Brandt and Santa-Clara (2006), and introducing a lock-up in line as per 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.

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Bibliographic Info

Article provided by Asian Real Estate Society in its journal International Real Estate Review.

Volume (Year): 17 (2014)
Issue (Month): 1 ()
Pages: 1-22

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Handle: RePEc:ire:issued:v:17:n:01:2014:p:1-22

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Postal: Asia Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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Web page: http://www.asres.org/

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Postal: Asian Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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Related research

Keywords: Asset Allocation; Illiquidity; Lock-Up; Multi-period Portfolio Optimization; REITs;

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References

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  1. Elias Oikarinen & Martin Hoesli & Camilo Serrano, 2011. "The Long-Run Dynamics between Direct and Securitized Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 33(1), pages 73-104.
  2. Eduardo S. Schwartz & Claudio Tebaldi, 2006. "Illiquid Assets and Optimal Portfolio Choice," NBER Working Papers 12633, National Bureau of Economic Research, Inc.
  3. Martin Hoesli & Jon Lekander & Witold Witkiewicz, 2004. "New International Evidence on Real Estate as a Portfolio Diversifier," Journal of Real Estate Research, American Real Estate Society, vol. 26(2), pages 161-206.
  4. Ledoit, Oliver & Wolf, Michael, 2008. "Robust performance hypothesis testing with the Sharpe ratio," Journal of Empirical Finance, Elsevier, vol. 15(5), pages 850-859, December.
  5. Jarl G. Kallberg & Crocker H. Liu & D. Wylie Greig, 1996. "The Role of Real Estate in the Portfolio Allocation Process," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(3), pages 359-377.
  6. Michael W. Brandt & Pedro Santa-Clara, 2006. "Dynamic Portfolio Selection by Augmentingthe Asset Space," Journal of Finance, American Finance Association, vol. 61(5), pages 2187-2217, October.
  7. Teiletche, Jérôme & Cao, Dan, 2007. "Reconsidering asset allocation involving illiquid assets," Economics Papers from University Paris Dauphine 123456789/1222, Paris Dauphine University.
  8. Ghysels, Eric & Pereira, João Pedro, 2008. "Liquidity and conditional portfolio choice: A nonparametric investigation," Journal of Empirical Finance, Elsevier, vol. 15(4), pages 679-699, September.
  9. Dirk Brounen & Melissa Porras Prado & Marno Verbeek, 2010. "Real Estate in an ALM Framework: The Case of Fair Value Accounting," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(4), pages 775-804, Winter.
  10. Gregory H. Chun & Brian A. Ciochetti & James D. Shilling, 2000. "Pension-Plan Real Estate Investment in an Asset-Liability Framework," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(3), pages 467-491.
  11. Joseph L. Pagliari & Kevin A. Scherer & Richard T. Monopoli, 2005. "Public Versus Private Real Estate Equities: A More Refined, Long-Term Comparison," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(1), pages 147-187, 03.
  12. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
  13. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  14. Wayne E. Ferson, 2001. "The Efficient Use of Conditioning Information in Portfolios," Journal of Finance, American Finance Association, vol. 56(3), pages 967-982, 06.
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