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Revisiting the Past and Settling the Score: Index Revision for House Price Derivatives

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Author Info
Eric Clapham (Stockholm School of Economics)
Peter Englund (Stockholm School of Economics)
John Quigley (University of California, Berkeley)
Christian Redfearn (University of Southern California)

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Abstract

This paper examines index revision in measuring the prices for owner-occupied housing. We consider the context of equity insurance and the settlement of futures contracts. In addition to other desirable characteristics for aggregate price indexes, their usefulness in these contexts requires stability as they are revised. Methods that are subject to substantial or complex revision raise questions about the viability of derivatives markets. Of course, all indexes are subject to revision as the result of new information. Nevertheless, we find that the most-widely used house price indexes are not equally exposed to volatility in revision. Hedonic indexes appear to be substantially more stable than repeat-sales indexes and are less prone to substantial revision in the light of new information. Moreover, we find that the repeat-sales indexes are subject to systematic downward revision. We analyze alternative settlement procedures and contracts to mitigate the impact of revision associated with repeat sale indexes.

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Paper provided by Berkeley Program on Housing and Urban Policy in its series Berkeley Program on Housing and Urban Policy, Working Paper Series with number 1059.

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Date of creation: 27 Jun 2006
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Handle: RePEc:cdl:bphupl:1059

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Related research
Keywords: Hedonic; House price index; Owner occupied housing;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robert J. Shiller, 1993. "Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures indices and Perpetual Futures," NBER Technical Working Papers 0131, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Theodore M. Crone & Richard P. Voith, 1992. "Estimating house price appreciation: a comparison of methods," Working Papers 92-21, Federal Reserve Bank of Philadelphia.
  3. Englund, Peter & Quigley, John M. & Redfearn, Christian L., 1998. "Improved Price Indexes for Real Estate: Measuring the Course of Swedish Housing Prices," Journal of Urban Economics, Elsevier, vol. 44(2), pages 171-196, September. [Downloadable!] (restricted)
  4. Hoesli, Martin & Giaccotto, Carmelo & Favarger, Philippe, 1997. "Three New Real Estate Price Indices for Geneva, Switzerland," The Journal of Real Estate Finance and Economics, Springer, vol. 15(1), pages 93-109, July. [Downloadable!] (restricted)
  5. Gatzlaff, Dean H & Haurin, Donald R, 1997. "Sample Selection Bias and Repeat-Sales Index Estimates," The Journal of Real Estate Finance and Economics, Springer, vol. 14(1-2), pages 33-50, Jan.-Marc. [Downloadable!] (restricted)
  6. Andrew Caplin & Sewin Chan & Charles Freeman & Joseph Tracy, 1997. "Housing Partnerships: A New Approach to a Market at a Crossroads," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032430.
  7. Brent R. Moulton, 2001. "The Expanding Role of Hedonic Methods in the Official Statistics of the United States," BEA Papers 0014, Bureau of Economic Analysis. [Downloadable!]
  8. Cropper, Maureen L & Deck, Leland B & McConnell, Kenneth E, 1988. "On the Choice of Functional Form for Hedonic Price Functions," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 668-75, November. [Downloadable!] (restricted)
  9. 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)
  10. William N. Goetzmann & Andrew Caplin & Eric Hangen & Barry Nalebuff & Elisabeth Prentice & John Rodkin & Tom Skinner & Matthew I. Spiegel, 2003. "Home Equity Insurance: A Pilot Project," Yale School of Management Working Papers ysm372, Yale School of Management. [Downloadable!]
  11. Shiller, Robert J, 1993. " Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures," Journal of Finance, American Finance Association, vol. 48(3), pages 911-31, July. [Downloadable!] (restricted)
  12. Crone, Theodore M. & Voith, Richard P., 1992. "Estimating house price appreciation: A comparison of methods," Journal of Housing Economics, Elsevier, vol. 2(4), pages 324-338, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yongheng Deng & John Quigley, 2008. "Index Revision, House Price Risk, and the Market for House Price Derivatives," The Journal of Real Estate Finance and Economics, Springer, vol. 37(3), pages 191-209, October. [Downloadable!] (restricted)
  2. A. Collins & A. E. Scorcu & R. Zanola, 2007. "Sample Selection Bias and Time Instability of Hedonic Art Price Indexes," Working Papers 610, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
  3. Robert J. Hill & Daniel Melser & Iqbal Syed, 2009. "Measuring a Boom and Bust: The Sydney Housing Market 2001-2006," Discussion Papers 2009-08, School of Economics, The University of New South Wales. [Downloadable!]
  4. John Quigley, 2006. "Real Estate Portfolio Allocation: The European Consumers' Perspective," Berkeley Program on Housing and Urban Policy, Working Paper Series 1075, Berkeley Program on Housing and Urban Policy. [Downloadable!]
    Other versions:
  5. Michel Baroni & Fabrice Barthe´le´my & Mahdi Mokrane, 2007. "APCA Factor Repeat Sales Index for Apartment Prices in Paris," Journal of Real Estate Research, American Real Estate Society, vol. 29(2), pages 137-158. [Downloadable!]
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