Revisiting the Past and Settling the Score: Index Revision for House Price Derivatives
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.
|Date of creation:||13 Sep 2007|
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- Case, Bradford & Pollakowski, Henry O & Wachter, Susan M, 1997. "Frequency of Transaction and House Price Modeling," The Journal of Real Estate Finance and Economics, Springer, vol. 14(1-2), pages 173-87, Jan.-Marc.
- 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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