Analyzing the Temporal Stability of Appraisal Model Coefficients: An Application of Ridge Regression Techniques

Abstract

The use of multiple regression analysis as a tool of real estate valuation has received considerable attention in recent years. The primary objectives of this study are to investigate the multicollinearity among the property characteristics (regressor variables) and examine the stability of the estimated regression coefficients over time. Ridge regression techniques are used to partially adjust for the presence of collinearity. The results indicate that the ridge regression model provides a consistent set of properly signed, statistically significant regression coefficients throughout the sample period. Furthermore, ridge regression techniques are shown to have certain advantages over those of ordinary least squares for establishing logical and consistent values for specific property characteristics.