Market Risk Factor and the Weighted Repeated Sales Method

31 Pages Posted: 31 May 2014 Last revised: 2 Nov 2017

See all articles by Ping Cheng

Ping Cheng

Florida Atlantic University - Finance

Xin He

Surrey International Institute, Dongbei University of Finance and Economics

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

Date Written: May 30, 2014

Abstract

This paper identifies a critical issue in the Weighted Repeated Sales (WRS) method – the omission of market risk in the weight estimation model specified by Case and Shiller (1989). It demonstrates that the omission of market risk is conceptually unjustified. Through extensive examination of the real estate market risk, the study not only proposes a modified WRS model that is empirically supported, but also contributes to the broad discussion on the term structure of the real estate risk. It also shows that the Case-Shiller weighting method is likely to be misspecified in nine of the ten cities where the Case-Shiller metro indices are "tradable" with housing options and futures contracts listed on the Chicago Mercantile Exchange. Using a large sample of repeated sales from Washington DC area, the original repeated sales method of Bailey, Muth, and Nourse (1963) and the Case-Shiller method are compared against the modified WRS, and the results indicate that market risk plays an important role in the index estimation.

Keywords: Market Risk Factor, Weighted Repeated Sales Method, Home Price Index

JEL Classification: R3

Suggested Citation

Cheng, Ping and He, Xin and Lin, Zhenguo and Liu, Yingchun, Market Risk Factor and the Weighted Repeated Sales Method (May 30, 2014). Journal of Real Estate Research, 2015, Vol. 37 (1), 1-22., Available at SSRN: https://ssrn.com/abstract=2443660

Ping Cheng

Florida Atlantic University - Finance ( email )

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

Xin He

Surrey International Institute, Dongbei University of Finance and Economics ( email )

217 Jianshan St,
Shahekou
Dalian, Liaoning
China

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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