56 Pages Posted: 10 Jun 2004
Date Written: January, 2005
In this paper three econometric issues related to private-equity return indices, such as real estate indices, are explored (smoothing, nonsynchronous appraisal, and cross-sectional aggregation). Under certain assumptions, it is found that index returns based on appraisals follow an ARFIMA(0,d,1) process, where the long memory parameter (d) explains the level of smoothing and the MA parameter explains the nonsynchronous appraisal problem. The empirical results show that: 1) the level of smoothing in appraisal based real estate indices is far less than assumed in many academic studies; 2) nonsynchronous appraisal problem exists and becomes a more serious problem for higher frequency returns; and, 3) the level of volatility of real estate securities is higher than that recovered from an appraisal based index by around 50 percent. We interpret this difference as the level of noise in stock markets.
Keywords: Smoothing, Nonsynchronous Appraisal, Long Memory
JEL Classification: C4, G12
Suggested Citation: Suggested Citation
Bond, Shaun A. and Hwang, Soosung, Smoothing, Nonsynchronous Appraisal and Cross-Sectional Aggregation in Real Estate Price Indices (January, 2005). EFA 2004 Maastricht Meetings Paper No. 4782; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=556095 or http://dx.doi.org/10.2139/ssrn.556095