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Is It Possible to Construct Derivatives for the Paris Residential Market?

  • Michel Baroni

    ()

  • Fabrice Barthélémy

    ()

  • Mahdi Mokrane

    ()

In this paper we address the issue of the robustness of the price level, mean, and variance estimates for two sets of repeat sales real estate price indices: the classical WRS method and a PCA factorial method, as elaborated in Baroni, Barthélémy and Mokrane (2007). We use an extensive repeat sales database for the Paris (France) residential market to compute the parameters of the indices produced over the period 1982-2005. The aim here is to test the sensitivity of these two indices to revision due to additional repeat-sales transactions information. Our main conclusion is that the revision problem may cause serious concern for the stability of key parameters that are used as inputs in the pricing of derivatives contracts. The impact of index revision is important on the estimate of the index price level. We also find that although the revision impact on the trend estimate can be important: the WRS method seems more robust and derivatives contracts such as swaps may be based on such indices. Finally, the revision influence on volatility estimates seems to be less stringent, and according to the robustness of the volatility estimate, the BBM factorial index seems to fare relatively better than the WRS index. Hence, we find that the factorial index could better sustain volatility based derivatives such as call or put options.

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File URL: http://hdl.handle.net/10.1007/s11146-008-9114-6
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Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 37 (2008)
Issue (Month): 3 (October)
Pages: 233-264

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Handle: RePEc:kap:jrefec:v:37:y:2008:i:3:p:233-264
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102945

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  1. repec:cup:cbooks:9780521424080 is not listed on IDEAS
  2. Clapp, John, 1998. "Revisions in Repeat Sales Price Indices: Here Today, Gone Tomorrow?," ERES eres1998_128, European Real Estate Society (ERES).
  3. 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.
  4. 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.
  5. Ghysels, E. & Gourieroux, C. & Jasiak, J., 1995. "Market Time and Asset Price Movements: Theory and Estimation," Cahiers de recherche 9536, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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