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Presentations at an Academic or Professional conference (2007)

Is it Possible to Construct Derivatives for the Paris Residential Market?


In this paper we address the issue the robustness of the price level, mean, and variance estimates for two sets of repeat sales real estate price indices: the WRS classical method and a PCA factorial method, as elaborated in Baroni, Barthélémy and Mokrane (2007). Our work can be seen as an extension of Clapham, Englund, Quigley and Redfearn (2006), with the aim of helping to judge of the efficiency of such indices in designing real estate derivatives contracts. We use an extensive repeat sales database for the Paris (France) residential market. We describe the dataset used and compute the parameters (drift and volatility) of the indices produced over the period 1982-2005. The aim here is to test the sensitivity of these two indices to revision due to additional repeat-sales transactions information. Our main conclusion is that the revision problem may cause serious concern for the stability of key parameters that are used as inputs in the pricing of derivatives contracts. The impact of index revision is important on the estimate of the index price level. This result is consistent with the finding of the existing literature for the US and Swedish markets. We also find that although the revision impact on the trend estimate can be important, the WRS method seems more robust and derivatives contracts such as swaps be still be conducted based such indices. Finally, and this is probably the most promising result, revision influence on volatility estimates seems to be less stringent, and according to the robustness of the volatility estimate, the BBM factorial index seems to fare relatively better than the WRS index. Hence, we conclude that the factorial index could better sustain volatility based derivatives such as call or put options.

BARONI, M., BARTHELEMY, F. and MOKRANE, M. (2007). Is it Possible to Construct Derivatives for the Paris Residential Market?

Keywords : #Dérivés-immobilier, #Indice-de-ventes-répétées