Examining Omitted Variable Bias in Anchoring Premium Estimates: Evidence Based on Assessed Value

64 Pages Posted: 5 Mar 2020 Last revised: 23 Mar 2021

See all articles by Tingyu Zhou

Tingyu Zhou

Florida State University

John M. Clapp

University of Connecticut - Department of Finance; Homer Hoyt Institute

Ran Lu-Andrews

California Lutheran University, School of Management

Date Written: February 8, 2020

Abstract

We propose a new assessed value approach to control for the amount of persistent unobserved quality. We apply our approach to a well-established two-stage framework developed by Genesove and Mayer (GM, 2001), who test the effect of an expected loss on final transaction prices in the housing market. We show that our assessed value model effectively mitigates the omitted variable bias and produces similar results as GM when the first-stage residual is included. Importantly, our model does not rely on repeat sales and therefore provides a powerful new tool for estimating market value. Results are robust to alternative specifications, to controlling for loan-to-value ratios, to replacing final sale price with listing price, to alternative fixed effects, to subperiods, to different holding periods, to simulated quality, to excluding flippers, and to controlling improvements between sales.

Keywords: Anchoring, Loss Aversion, Repeat Sales, Omitted Variable Bias, Unobserved Heterogeneity

JEL Classification: C1, E00, R3

Suggested Citation

Zhou, Tingyu and Clapp, John M. and Lu-Andrews, Ran, Examining Omitted Variable Bias in Anchoring Premium Estimates: Evidence Based on Assessed Value (February 8, 2020). Available at SSRN: https://ssrn.com/abstract=3534732 or http://dx.doi.org/10.2139/ssrn.3534732

Tingyu Zhou (Contact Author)

Florida State University ( email )

821 Academic Way
Tallahassee, FL 32306
United States

John M. Clapp

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/

Ran Lu-Andrews

California Lutheran University, School of Management ( email )

60 W. Olsen Road
School of Management
Thousand Oaks, CA California 91360
United States

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