Title Using Ridge Regression to Improve the Accuracy and Interpretatoin of the Hedonic Pricing Model : Focusing on apartments in Guro-gu, Seoul
Authors Koo, Bonsang ; Shin, Byungjin
DOI http://dx.doi.org/10.6106/KJCEM.2015.16.5.077능형회귀분석을 활용한 부동산 헤도닉 가격모형의 정확성 및 해석력 향상에 관한 연구
Page pp.77-85
ISSN 2005-6095
Keywords Hedonic price model ; Multi-colinearity ; Variance Inflation Factor ; Ridge Regression
Abstract The Hedonic Pricing model is the predominant approach used today to model the effect of relevant factors on real estate prices. These factors include intrinsic elements of a property such as floor areas, number of rooms, and parking spaces. Also, The model also accounts for the impact of amenities or undesirable facilities of a property's value. In the latter case, euclidean distances are typically used as the parameter to represent the proximity and its impact on prices. However, in situations where multiple facilities exist, multi-colinearity may exist between these parameters, which can result in multi-regression models with erroneous coefficients. This research uses Variance Inflation Factors(VIF) and Ridge Regression to identify these errors and thus create more accurate and stable models. The techniques were applied to apartments in Guro-gu of Seoul, whose prices are impacted by subway stations as well as a public prison, a railway terminal and a digital complex. The VIF identified colinearity between variables representing the terminal and the digital complex as well as the latitudinal coordinates. The ridge regression showed the need to remove two of these variables. The case study demonstrated that the application of these techniques were critical in developing accurate and robust Hedonic Pricing models.