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The Bias of the RSR Estimator and the Accuracy of Some Alternatives

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Author Info
William N. Goetzmann
Liang Peng

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Abstract

This paper analyzes the implications of cross-sectional heteroskedasticity in the repeat sales regression (RSR). RSR estimators are essentially geometric averages of individual asset returns because of the logarithmic transformation of price relatives. We show that the cross-sectional variance of asset returns affects the magnitude of the bias in the average return estimate for each period, while reducing the bias for the surrounding periods. It is not easy to use an approximation method to correct the bias problem. We suggest an unbiased maximum likelihood alternative to the RSR that directly estimates index returns, which we term MLRSR. The unbiased MLRSR estimators are analogous to the RSR estimators but are arithmetic averages of individual asset returns. Simulations show that these estimators are robust to time-varying cross-sectional variance and that the MLRSR may be more accurate than RSR and some alternative methods. Copyright 2002 by the American Real Estate and Urban Economics Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1540-6229.00028
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Publisher Info
Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 30 (2002)
Issue (Month): 1 ()
Pages: 13-39
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Handle: RePEc:bla:reesec:v:30:y:2002:i:1:p:13-39

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  1. Jesse M. Abraham & William S. Schauman, 1991. "New Evidence on Home Prices from Freddie Mac Repeat Sales," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(3), pages 333-352. [Downloadable!] (restricted)
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Cited by:
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  1. James Pesando & Pauline Shum, 2007. "The law of one price, noise and “irrational exuberance”: the auction market for Picasso prints," Journal of Cultural Economics, Springer, vol. 31(4), pages 263-277, December. [Downloadable!] (restricted)
  2. Jianping Mei & Michael Moses, 2002. "Art as an Investment and the Underperformance of Masterpieces," American Economic Review, American Economic Association, vol. 92(5), pages 1656-1668, December. [Downloadable!]
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This page was last updated on 2009-11-22.

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