Controlling Unobserved Heterogeneity in Repeat Sales Models: Application to Anchoring to Purchase Price

80 Pages Posted: 22 Apr 2019 Last revised: 6 Apr 2020

See all articles by John M. Clapp

John M. Clapp

University of Connecticut - Department of Finance; Homer Hoyt Institute

Tingyu Zhou

Florida State University

Date Written: April 4, 2020

Abstract

Stocks, art, housing and other assets are often studied in a two-stage repeat sales framework to control unobserved heterogeneity. But unobserved variables that influence both first and second sales remain a troubling source of omitted heterogeneity. We develop an iterative simulation algorithm to mitigate omitted variable bias which can be estimated with standard hedonic data in many repeat sales studies. We illustrate our model with an application to seller anchoring to the price paid for a house. We find that premiums on expected losses are reduced by about 50% compared to conventional models, as expected if our algorithm reduces unobserved heterogeneity. We also show that the probability of sale is strongly negatively associated with quality-adjusted expected losses, consistent with theory and previous empirical evidence on anchoring and sales volume. In contrast, losses measured conventionally produce the opposite results. Our study has general implications for two-stage estimation in the finance literature.

Keywords: Repeat Sales, Unobserved Heterogeneity, Simulation Algorithm, Anchoring, Loss Aversion

JEL Classification: C1, E00, R3

Suggested Citation

Clapp, John M. and Zhou, Tingyu, Controlling Unobserved Heterogeneity in Repeat Sales Models: Application to Anchoring to Purchase Price (April 4, 2020). Available at SSRN: https://ssrn.com/abstract=3358401 or http://dx.doi.org/10.2139/ssrn.3358401

John M. Clapp (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-983-3685 (Phone)
860-486-0349 (Fax)

Homer Hoyt Institute ( email )

United States

HOME PAGE: http://hoytgroup.org/weimer-school-and-fellows/

Tingyu Zhou

Florida State University ( email )

821 Academic Way
Tallahassee, FL 32306
United States

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