The Effect of Seller Reserves on Market Index Estimation

Abstract:     
This paper examines the effect of seller reserves on market index construction. It reports the results of simulations in which transactions are conditioned upon various reservation strategies. Indices constructed by averaging across observed conditional prices each period differ dramatically from unconditional indices. Not only are conditional price levels higher, but the dynamics of the price path are changed. Time-series' of conditional mean returns are not highly correlated to the time-series' of unconditional mean returns, and average return estimates are biased upwards. Alternate estimation procedures provide clear improvements to the conditional mean estimate. Volume of sales is a significant predictor of returns in the presences of certain types of reservation behavior. Hedonic control via the repeat-sales regression provides significant improvements, generating an index that is well correlated to the unconditional mean estimate. The repeat-sales regression fails to reduce the upward bias in mean estimates. The simulation results have particular application to the art and housing markets, in which private values may be used to set reservation prices.

JEL Classifications: G0, Z1, R1

Working Paper Series