The Long and Short Side of Real Estate, Real Estate Stocks, and Equity

This thesis consists of three studies in the investments field, which examines the interaction between long and short positions and their impact on market participants, prices and portfolio allocations. In chapter 2, I examine the optimal portfolio composition for institutional investors when considering liabilities. Institutional investors, by taking into account their short positions, which in effect are their liabilities, make different asset allocation decisions (long positions). Important in the optimization in excess of liabilities is the role of the asset classes in hedging the market value of liabilities. In chapter 3, I turn to the impact of short positions of market participants on prices by showing that limits to shorting lead to biased prices. In particular, I find that the presence of short sale constraints can explain the existence of a premium to Net Asset Value for Real Estate Investment Trusts. Miller (1977) argues that as short-sale constraints keep more pessimistic investors out of the market, prices tend to reflect a more optimistic valuation than they otherwise would. The results of 4 suggest that overpricing caused by the presence of short sale constraints is not solely due to restriction on negative information but also partly a result of capitalized lending income. I show that revenue associated with security lending is capitalization in prices, as investors are willing to pay a premium associated with lending fees.

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