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ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School

No DR 05002: A PCA Factor Repeat Sales Index (1973-2001) To Forecast Apartment Prices in Paris (France)

Michel Baroni (), Fabrice Barthélémy () and Mahdi Mokrane ()
Additional contact information
Michel Baroni: ESSEC Business School, Postal: Avenue Bernard Hirsch - B.P. 50105, 95021 CERGY-PONTOISE CEDEX , FRANCE
Fabrice Barthélémy: THEMA, Université de Cergy-Pontoise, Postal: 33 Bd du Port, 95011 CERGY-PONTOISE CEDEX , FRANCE
Mahdi Mokrane: IXIS-AEW Europe, Postal: 12/20 rue Fernand Braudel, 75013 PARIS, FRANCE

Abstract: In this paper we address the issue of building a repeat sales index, based on factors. This is an extension of a companion paper, Baroni, Barthélémy and Mokrane (2001, BBM) in which we had built a factorial index as a selected linear function of existing economics and financial variables. Here we offer a more general and robust model based on a Principal Components Analysis (PCA). We apply this methodology to the Paris residential market. We use the CD-BIEN database that contains more than 220 000 repeat sales transactions for residential apartments in the Paris area covering the period 1973-2001 period. Our PCA index for the Paris and close surrounding area is estimated and its characteristics and robustness are analysed depending on: estimation period, choice of observations, periodicity and reversibility. We then compare it to the traditional WRS repeat sales index developed by Case & Shiller (1987). Finally we show that contrary to the WRS index, our index can be used to forecast apartment prices.

Keywords: Real estate indices; Repeat sales; Factors; PCA; Index forecasting

JEL-codes: C20; G00

36 pages, February 2005

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