Heterogeneous Information and Appraisal Bias

39 Pages Posted: 1 Dec 2010

See all articles by Ping Cheng

Ping Cheng

Florida Atlantic University - Finance

Zhenguo (Len) Lin

Florida International University (FIU) - Hollo School of Real Estate

Yingchun Liu

Dept. of Finance, Insurance, Real Estate and Law, University of North Texas

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Date Written: January 7, 2011

Abstract

This study examines the heterogeneous appraiser behavior and its implication on the traditional appraisal smoothing theory. We show that the partial adjustment model is consistent with the traditional appraisal smoothing argument (Geltner 1989) only when all the appraisers choose the same smoothing technique. However, if appraiser behavior is heterogeneous and exhibits cross-sectional variation due to the difference in their access to, and interpretation of information from various sources, the model actually leads to a different outcome: The appraisal-based returns may exaggerate rather than understate the volatility of transaction-based returns. Using data from the residential market, we find that the appraisal-based returns are in fact less smoothed (or more volatile) than the comparable transaction-based returns. This finding suggests that the traditional appraisal smoothing theory, which fails to consider the heterogeneity of appraiser behaviors, exaggerate the effect of appraisal smoothing.

JEL Classification: R3

Suggested Citation

Cheng, Ping and Lin, Zhenguo and Liu, Yingchun, Heterogeneous Information and Appraisal Bias (January 7, 2011). 46th Annual AREUEA Conference Paper, Available at SSRN: https://ssrn.com/abstract=1716960 or http://dx.doi.org/10.2139/ssrn.1716960

Ping Cheng

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States
561-297-3456 (Phone)
561-297-3686 (Fax)

Zhenguo Lin (Contact Author)

Florida International University (FIU) - Hollo School of Real Estate ( email )

Miami, FL 33199
United States
3057799248 (Phone)

Yingchun Liu

Dept. of Finance, Insurance, Real Estate and Law, University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

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