Locked up by a lockup
Subtitle: valuing liquidity as a real option
By: Andrew Ang, Nicolas P.B. Bollen
Contributors: Bollen, Nicolas P.B.; National Bureau of Economic Research
Series: NBER working paper series -- working paper 15937; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 15937.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "Hedge funds often impose lockups and notice periods to limit the ability of investors to withdraw capital.  We model the investor's decision to withdraw capital as a real option and treat lockups and notice periods as exercise restrictions.  Our methodology incorporates time-varying probabilities of hedge fund failure and optimal early exercise.  We estimate a two-year lockup with a three-month notice period costs approximately 1% of the initial investment for an investor with CRRA utility and risk aversion of three.  The cost of illiquidity can easily exceed 10% if the hedge fund manager can arbitrarily suspend withdrawals"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 5/6/2010.

Includes bibliographical references.

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