Revisiting the Past and Settling the Score: Index Revision for House Price Derivatives

∗∗∗ ∗∗∗ ∗∗∗∗ This article examines index revision in measuring the prices for owner-occupied housing. We consider revision in the context of equity insurance and the settlement of futures contracts. The usefulness of aggregate housing price indexes in these contexts requires stability as they are extended. Methods that are subject to substantial revision raise questions about the viability of derivatives markets. We find that the most widely used house price indexes are not equally exposed to volatility in revision. Hedonic indexes appear to be substantially more stable than repeat-sales indexes and are not prone to the systematic downward revision found in the repeat-sales indexes. Most of the statistical series used to describe the workings of the economy are subject to periodic reexamination and reestimation. Indexes are revised when either the method used to incorporate data or the data themselves are updated. Index revision of the former type is illustrated by the changes in the Consumer Price Index (CPI) that arose from implementing the findings of the Advisory Commission to Study the CPI (the so-called “Boskin Commission”). In this case, the CPI was rebenchmarked through the adoption of new practices based on economic theory. 1 Index revision of the latter type results from the reestimation of the index after the arrival of new information. 2 We focus on index