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

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  • William N. Goetzmann
  • Liang Peng

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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Bibliographic 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.
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Cited by:
  1. Erdős, Péter & Ormos, Mihály, 2012. "Pricing of collectibles: Baedeker guidebooks," Economic Modelling, Elsevier, vol. 29(5), pages 1968-1978.
  2. Roman Kraussl & Arthur Korteweg & Patrick Verwijmeren, 2013. "Does it Pay to Invest in Art? A Selection-corrected Returns Perspective," LSF Research Working Paper Series 13-7, Luxembourg School of Finance, University of Luxembourg.
  3. James Bugden, 2013. "Renovations and the Repeat-Sales House Price Index," Working Papers 2013.08, School of Economics, La Trobe University.
  4. Rainer Schulz & Martin Wersing & Axel Werwatz, 2013. "Automated Valuation Modelling: A Specification Exercise," SFB 649 Discussion Papers SFB649DP2013-046, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Arthur Korteweg & Roman Kr�ussl & Patrick Verwijmeren, 2013. "Does it pay to invest in Art? A Selection-corrected Returns Perspective," Tinbergen Institute Discussion Papers 13-152/IV/DSF61, Tinbergen Institute.
  6. Campbell, Rachel & Graddy, Kathryn & Hamilton, Jonathan, 2009. "Repeat Sales Indexes: Estimation Without Assuming that Errors in Asset Returns Are Independently Distributed," CEPR Discussion Papers 7344, C.E.P.R. Discussion Papers.
  7. Liang Peng, 2012. "Repeat Sales Regression on Heterogeneous Properties," The Journal of Real Estate Finance and Economics, Springer, vol. 45(3), pages 804-827, October.
  8. Erdos, Péter & Ormos, Mihály, 2010. "Random walk theory and the weak-form efficiency of the US art auction prices," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1062-1076, May.
  9. 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.
  10. 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.

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