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

  • Deng, Yongheng
  • Quigley, John M.

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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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 qt4sw0x30t.

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Date of creation: 11 Apr 2008
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Handle: RePEc:cdl:bphupl:qt4sw0x30t
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  1. 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.
  2. Iacoviello, Matteo & Ortalo-Magne, Francois, 2003. "Hedging Housing Risk in London," The Journal of Real Estate Finance and Economics, Springer, vol. 27(2), pages 191-209, September.
  3. 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.
  4. 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.
  5. Quigley, John M., 2006. "Real estate portfolio allocation: The European consumers' perspective," Journal of Housing Economics, Elsevier, vol. 15(3), pages 169-188, September.
  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. Karl E. Case & Robert J. Shiller, 1988. "The Efficiency of the Market for Single-Family Homes," NBER Working Papers 2506, National Bureau of Economic Research, Inc.
  8. 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.
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