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Volatility of price indices for heterogeneous goods

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  • Fabian Y.R.P. Bocart
  • Christian M. Hafner

Abstract

Price indices for heterogenous goods such as real estate or fine art constitute crucial information for institutional or private investors considering alternative investments in times of financial markets turmoil. Classical mean-variance analysis of alternative investments has been hampered by the lack of a systematic treatment of volatility in these markets. This may seem surprising as derivatives on subsets of the traded goods require a precise modelling and estimation of the underlying volatility. For example, in art markets, auction houses often give price guarantees to the seller that resemble put options. In this paper we propose a hedonic regression framework which explicitly defines an underlying stochastic process for the price index, allowing to treat the volatility parameter as the object of interest. The model can be estimated using maximum likelihood in combination with the Kalman filter. We derive theoretical properties of the volatility estimator and show that it outperforms the standard estimator. We show that extensions to allow for time-varying volatility are straightforward using a local-likelihood approach. In an application to a large data set of international blue chip artists, we show that volatility of the art market, although generally lower than that of financial markets, has risen over the last years and, in particular, during the recent European debt crisis.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2012-039.

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Length: 34 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2012-039

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Keywords: Volatility; heterogenous goods; hedonic regression; random effects;

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References

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  1. Schulz, Rainer & Werwatz, Axel, 2001. "A state space model for Berlin house prices," SFB 373 Discussion Papers 2001,58, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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  3. Gouriéroux, Christian & Laferrère, Anne, 2009. "Managing hedonic housing price indexes: The French experience," Journal of Housing Economics, Elsevier, vol. 18(3), pages 206-213, September.
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  6. Collins, Alan & Scorcu, Antonello & Zanola, Roberto, 2009. "Reconsidering hedonic art price indexes," Economics Letters, Elsevier, vol. 104(2), pages 57-60, August.
  7. Dorsey, Robert E. & Hu, Haixin & Mayer, Walter J. & Wang, Hui-chen, 2010. "Hedonic versus repeat-sales housing price indexes for measuring the recent boom-bust cycle," Journal of Housing Economics, Elsevier, vol. 19(2), pages 75-93, June.
  8. Combris, Pierre & Lecocq, Sebastien & Visser, Michael, 1997. "Estimation for a Hedonic Price Equation for Bordeaux Wine: Does Quality Matter?," Economic Journal, Royal Economic Society, vol. 107(441), pages 390-402, March.
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  12. Andrew M. Jones & Roberto Zanola, 2011. "Retransformation bias in the adjacent art price index," ACEI Working Paper Series AWP-01-2011, the Association for Cultural Economics International, revised Jul 2011.
  13. Erdal Atukeren & Aylin Seçkin, 2006. "Art and the Economy: A First Look at the Market for Paintings in Turkey," Economics Bulletin, AccessEcon, vol. 26(3), pages 1-13.
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  19. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291, September.
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  22. Ginsburgh, Victor & Mei, Jianping & Moses, Michael, 2006. "The Computation of Prices Indices," Handbook of the Economics of Art and Culture, Elsevier.
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