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Index Revision, House Price Risk, and the Market for House Price Derivatives

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  • Yongheng Deng

    ()

  • John Quigley

    ()

Abstract

It is widely recognized that options and futures markets for housing can reduce and manage the risks inherent in consumers’ large investments in housing equity. The integrity of such markets depends, however, upon the use of transparent and replicable benchmarks for house prices and settlement values. In the USA, a series of state and metropolitan indexes have been produced by a government agency (the US Office of Housing Enterprise Oversight, OFHEO), and they have been widely disseminated for over a decade. By construction, the entire historical path of each of these indexes is, in principle, subject to revision quarterly, that is, every time the index is recalculated and data are published. This paper provides the first analysis of the magnitude and bias of these revisions, and it analyzes their systematic effects on the settlement prices in housing options markets. The paper considers the implications of these magnitudes for the development of risk-reducing futures markets.

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File URL: http://hdl.handle.net/10.1007/s11146-008-9113-7
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Bibliographic Info

Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 37 (2008)
Issue (Month): 3 (October)
Pages: 191-209

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Handle: RePEc:kap:jrefec:v:37:y:2008:i:3:p:191-209

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Web page: http://www.springerlink.com/link.asp?id=102945

Related research

Keywords: Repeat sales index; Index revision; House price risk; House price derivative; G11; R21; G13;

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References

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  1. Quigley, John M., 2006. "Real estate portfolio allocation: The European consumers' perspective," Journal of Housing Economics, Elsevier, vol. 15(3), pages 169-188, September.
  2. Englund, Peter & Hwang, Min & Quigley, John M, 2002. "Hedging Housing Risk," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 167-200, Jan.-Marc.
  3. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
  4. 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.
  5. Matteo Iacoviello, 2002. "Hedging Housing Risk in London," FMG Discussion Papers dp415, Financial Markets Group.
  6. Eric Clapham & Peter Englund & John M. Quigley & Christian L. Redfearn, 2006. "Revisiting the Past and Settling the Score: Index Revision for House Price Derivatives," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(2), pages 275-302, 06.
  7. John M. Clapp & Carmelo Giaccotto, 1999. "Revisions in Repeat-Sales Price Indexes: Here Today, Gone Tomorrow?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(1), pages 79-104.
  8. Andrew Caplin & William Goetzmann & Eric Hangen & Barry Nalebuff & Elisabeth Prentice & John Rodkin & Matthew Spiegel & Tom Skinner, 2003. "Home Equity Insurance: A Pilot Project," Yale School of Management Working Papers ysm372, Yale School of Management, revised 23 Jan 2006.
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Citations

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Cited by:
  1. Jing Wu & Yongheng Deng & Hongyu Liu, 2014. "House Price Index Construction in the Nascent Housing Market: The Case of China," The Journal of Real Estate Finance and Economics, Springer, vol. 48(3), pages 522-545, April.
  2. M.I. Dröes & H. Garretsen & W.J.J. Manshanden, 2012. "The Diversification Benefits of Free Trade in House Value," Working Papers 12-03, Utrecht School of Economics.
  3. Yongheng Deng, 2012. "Discussant remarks on Chihiro Shimizu, Kiyohiko G Nishimura and Tsutomu Watanabe’s paper House prices from magazines, realtors,and the Land Registry," BIS Papers chapters, in: Bank for International Settlements (ed.), Property markets and financial stability, volume 64, pages 39-41 Bank for International Settlements.
  4. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2010. "Unit Roots and Structural Change: An Application to US House-Price Indices," Working Papers 1004, University of Nevada, Las Vegas , Department of Economics.
  5. Deng, Yongheng & McMillen, Daniel P. & Sing, Tien Foo, 2012. "Private residential price indices in Singapore: A matching approach," Regional Science and Urban Economics, Elsevier, vol. 42(3), pages 485-494.
  6. Arnaud Simon, 2009. "Quantifying the reversibility phenomenon for the repeat-sales index," Journal of Real Estate Research, American Real Estate Society, vol. 31(1), pages 27-62.

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