Abstract

It It is widely recognized that options and futures markets for housing can
reduce and manage the risks inherent in consumers’ large investments in housing
equity. The integrity of such markets depends, however, upon the use of transparent
and replicable benchmarks for house prices and settlement values. In the USA, a
series of state and metropolitan indexes have been produced by a government
agency (the US Office of Housing Enterprise Oversight, OFHEO), and they have
been widely disseminated for over a decade. By construction, the entire historical
path of each of these indexes is, in principle, subject to revision quarterly, that is,
every time the index is recalculated and data are published. This paper provides the
first analysis of the magnitude and bias of these revisions, and it analyzes their
systematic effects on the settlement prices in housing options markets. The paper
considers the implications of these magnitudes for the development of risk-reducing
futures markets.

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