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

Author

Listed:
  • 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.

Suggested Citation

  • Martin Hoesli & Eva Liljeblom & Anders Loflund, 2014. "The Effect of Lock-Ups on the Suggested Real Estate Portfolio Weight," International Real Estate Review, Asian Real Estate Society, vol. 17(1), pages 1-22.
  • Handle: RePEc:ire:issued:v:17:n:01:2014:p:1-22
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    References listed on IDEAS

    as
    1. 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.
    2. Schwartz, Eduardo S & Tebaldi, Claudio, 2004. "Illiquid Assets and Optimal Portfolio Choice," University of California at Los Angeles, Anderson Graduate School of Management qt7q65t12x, Anderson Graduate School of Management, UCLA.
    3. 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.
    4. 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.
    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.
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    9. 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, March.
    10. 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.
    11. 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.
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    14. repec:dau:papers:123456789/1222 is not listed on IDEAS
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    More about this item

    Keywords

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

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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