Use of Apprisal Data should, assets, someone

cfalevel2011

When you use apprisal data, the correlation to other assets class are biased downwards compared to the true correlation, also the true variance of the asset is bisased downwards.

can someone explain why the true variance is biased downwards?

I thought the true variance should be biased upwards since apprisal data somewhat smoothes out the volalility.

infinitybenzo

Thats what I thought too, and I got the question wrong. Any explanations?

ohai

Appraisal data is "stale", that is volatility in asset prices are not truly known due to the infrequent measurement of real estate values, therefore correlations are biased downwards.

Iginla2011

BTON04 Wrote:
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> Appraisal data is "stale", that is volatility in
> asset prices are not truly known due to the
> infrequent measurement of real estate values,
> therefore correlations are biased downwards.


you stated the obvious, the question doesn't pertain to correlation as I have noted above but rather to the VARIANCE of the asset.

ll11

ok you are right..but again the if you cannot truly observe the asset value because the same is not readily tradeable, the measured values as reported by appraisals will not exhibit the variance due to infrequent measurement of appraisals.

jmh530

kurmanal Wrote:
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> Since the appraisals are done infrequently, you
> will have infrequent price changes. This means you
> will not "see" any movements between appraisal
> dates. Since you only see "the smoothed"
> increase/decrease in price, your computed standard
> deviation will be lower compared to highly liquid
> assets


exactly, but the CFA states that the TRUE variance (starndard deviation) will actually be the lower one having a downward bias.

read the statement above.

Zestt

think of the formula (the diversification effect) - Variance = (..... + 2*w1*w2*stddev1*stddev2*correlation coefficient). Since correlation coefficient is lowered, so is the variance.

Analyze_This

mp2438 Wrote:
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> think of the formula (the diversification effect)
> - Variance = (..... +
> 2*w1*w2*stddev1*stddev2*correlation coefficient).
> Since correlation coefficient is lowered, so is
> the variance.


variance of the asset class to itself not with a another asset. that's what it's stating.

mcmc

to me, variance is easy to get, but correlation is pretty hard to understand. I thought

appraisal smooth >> higher Rsquared >> higher correlation. when data is smoothed, it is more likely develop dependent relationship with others; if volatile, highly possible the Rsquared will be low, hence lower correlation.

did I miss anything?

Unforseen

I don't know if this helps...but take a look at this...

asset 1 (mvs' are smoothed intra-quarter and refreshed at end of year)
quarter 1 - 100
quarter 2 - 100
quarter 3 - 100
quarter 4 (end of year) - 90

asset 2 (mv's are refreshed quarterly)
quarter 1 - 100
quarter 2 - 85
quarter 3 - 105
quarter 4 (end of year) - 90

if you compare asset 1 and asset 2, their correlations will be biased downwards due to smoothing, even though they both end up at the same mv at end of the year.

and asset 1 will have low variance and standard deviation than asset 2 due to smoothing....

this is how I keep is straight in my mind.