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New Hedonic Quality Adjustment Method using Sparse Estimation

Author

Listed:
  • Sahoko Furuta

    (Bank of Japan)

  • Yudai Hatayama

    (Bank of Japan)

  • Atsushi Kawakami

    (Bank of Japan)

  • Yusuke Oh

    (Bank of Japan)

Abstract

In the application of the hedonic quality adjustment method to the price index, multicollinearity and the omitted variable bias arise as practical issues. This study proposes the new hedonic quality adjustment method using esparse estimation f in order to overcome these problems. The new method deals with these problems by ensuring two properties: the egrouped effect f that gives robustness for multicollinearity and the eoracle property f that provides the appropriate variable selection and asymptotically unbiased estimators. We conduct an empirical analysis applying the new method to the producer price index of passenger cars in Japan. In comparison with the conventional standard estimation method, the new method brings the following benefits: 1) a significant increase in the number of variables in the regression model; 2) an improvement in the fit of the regression model to actual prices; and 3) reduced overestimation of the product quality improvements due to the omitted variable bias. These results suggest the possible improvement in the accuracy of the price index while enhancing the usefulness of the hedonic quality adjustment method.

Suggested Citation

  • Sahoko Furuta & Yudai Hatayama & Atsushi Kawakami & Yusuke Oh, 2021. "New Hedonic Quality Adjustment Method using Sparse Estimation," Bank of Japan Working Paper Series 21-E-8, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp21e08
    as

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    File URL: https://www.boj.or.jp/en/research/wps_rev/wps_2021/data/wp21e08.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Price Index; Quality Adjustment; Hedonic Regression Model; Multicollinearity; Omitted Variable Bias; Sparse Estimation; Adaptive Elastic Net;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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