Is it possible to construct derivatives for the Paris residential market?
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). Our work can be seen as an extension of Clapham, Englund, Quigley and Redfearn (2006), with the aim of helping to judge of the efficiency of such indices in designing real estate derivatives contracts. We use an extensive repeat sales database for the Paris (France) residential market. We describe the dataset used and compute the parameters (drift and volatility) 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 analysis is conducted on the global Paris market and on submarkets. 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. This result is consistent with the finding of the existing literature for the US and Swedish markets. 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, and this is probably the most promising result, 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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- 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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- Ghysels, E. & Gourieroux, C. & Jasiak, J., 1995. "Market Time and Asset Price Movements: Theory and Estimation," Cahiers de recherche 9536, Universite de Montreal, Departement de sciences economiques.
- 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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- 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.
- Clapham, Eric & Englund, Peter & Quigley, John M. & Redfearn, Christian L., 2007. "Revisiting the Past and Settling the Score: Index Revision for House Price Derivatives," Berkeley Program on Housing and Urban Policy, Working Paper Series qt1m2340dt, Berkeley Program on Housing and Urban Policy.
- Spanos,Aris, 1999. "Probability Theory and Statistical Inference," Cambridge Books, Cambridge University Press, number 9780521424080, October.
- Michel Baroni & Fabrice BartheÂ´leÂ´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. Full references (including those not matched with items on IDEAS)