Quantifying the Reversibility Phenomenon for the Repeat-Sales Index
36 Pages Posted: 5 Jan 2009 Last revised: 16 Oct 2009
Date Written: December 30, 2008
Abstract
The reversibility phenomenon in the repeat-sales index (RSI) is a serious obstacle for derivatives products. This article provides a solution for this problem, using an informational reformulation of the RSI framework. A theoretical formula (simple, easy to interpret, and easy to handle) is presented. For the derivatives, the technique has strong implications for the choice of underlying index and contract settlement. Even if reversibility of the RSI is probably higher compared with the hedonic approach, this index remains a challenger because of the predictability and quantifiability of its revisions.
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