Advantages And Disadvantages Of Hedonic Regression

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3.1 A COMPARATIVE APPROACH TO PICASSO INDEX COMPUTATION

The great attraction of hedonic models in economic literature is related to the fact that all the data may be used in the estimation process, also for items offered for sale only once in the sample time period.
The disadvantage of this model is the strong and erroneous assumption that a (typically small) set of x variables captures much of the variability in the fixed components of price. This assumption is particularly relevant in the regression process if the estimates of the time effects are to be precise. Item attributes are considering static over time, implying unbiased estimates of the time effects.
The primary disadvantages of the model could be overcome through the adoption
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They built two price indexes, on for each model, and they infer some critical conclusions. They use data from Impressionists and Modern Paintings. When on the dataset is applied the hedonic regression model, the regression includes a totality of 8792 observations, while the repeat sale estimates are based on much less observations (474 observations). Three main economists analysed this model and compared the resulting indexes. They were Chanel, Gerard-Varet, and Ginsburgh (1996). The result of the studies indicates that both models results in equal estimates of the real rates of return in art assets over long periods of identical magnitude.
Additionally, the economists inferred that the hedonic model often provide correct estimates for the in some cases the ‘’time-series movements in aggregate prices’’.
Nevertheless, the hedonic regression implies always a potential bias related to the unobserved oscillations in items’ attributes over time. Their systematic movements are ignored and this is clear in the study by Ashenfelter and Graddy (2003) which realizes a comparison of data from Impressionist and Modern
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At a first sight, they have a similar appearance.
The below table, reports a track of the two indexes for the two painting categories between 1980 and
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