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

Author

Listed:
  • Martin Hoesli

    (University of Geneva, University of Aberdeen, and Swiss Finance Institute)

  • Eva Liljeblom

    (Swedish School of Economics and Business Administration)

  • Anders Löflund

    (Hanken School of Economics)

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.

Suggested Citation

  • Martin Hoesli & Eva Liljeblom & Anders Löflund, 2012. "The Effect of Lock-Ups on the Suggested Real Estate Portfolio Weight," Swiss Finance Institute Research Paper Series 12-22, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1222
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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