Why do appraisal-based indices often suffer from smoothed returns?

Appraisal-based indices often suffer from smoothed returns because they lag true market value. This phenomenon occurs because the values recorded in these indices are derived from periodic appraisals rather than real-time transactions. Appraisers assess the market value of assets based on subjective criteria and historical performance, which can lead to adjustments that do not reflect immediate market conditions. As a result, the indices tend to show less volatility and may not accurately represent sharp changes in market value, leading to the appearance of smoother returns over time.

The smoothing effect can obscure the true risk and return profile of the assets being evaluated, making it challenging for investors to gauge performance accurately. Consequently, while these indices can provide insights about long-term trends in asset values, they are less reliable for assessing short-term market movements.