@techreport{NBERw15937,
 title = "Locked Up by a Lockup: Valuing Liquidity as a Real Option",
 author = "Andrew Ang and Nicolas P.B. Bollen",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "15937",
 year = "2010",
 month = "April",
 URL = "http://www.nber.org/papers/w15937",
 abstract = {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.},
}