Does it Pay to Invest in Art? A Selection-Corrected Returns Perspective (pdf) This paper shows the importance of correcting for sample selection when investing in illiquid assets with endogenous trading. Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns. The selection-corrected average annual index return is 7 percent, down from 11 percent for traditional uncorrected repeat-sales regressions, and Sharpe Ratios drop from 0.4 to 0.1. From a pure financial perspective, passive index investing in paintings is not a viable investment strategy, once selection bias is accounted for. Our results have important implications for other illiquid asset classes that trade endogenously.

Is there a Bubble in the Art Market? (pdf) The record-breaking prices observed in the art market for the last three years have rais the question of whether we are experiencing a speculative bubble. Given the difficulty to determine the fundamental value of artworks, we apply a right-tailed unit root test with forward recursive regressions (SADF test) to detect explosive behaviors directly in the time series of four different art market segments (“Impressionist and Modern”, “Post-war and Contemporary”, “American”, and “Latin American”) for the period from 1970 to 2013. We identify two historical speculative bubbles and find an explosive movement in today’s “Post-war and Contemporary” and “American” fine art market segments.

Art as an Aternative Asset Class: Risk and Return Characteristics of the Middle Eastern & Northern African Art Markets (pdf) This chapter analyzes the risk and return characteristics of investments in artists from the Middle East and Northern Africa (MENA) region over the sample period 2000 to 2012. With hedonic regression modeling we create an annual index that is based on 3,544 paintings created by 663 MENA artists. Our empirical results prove that investing in such a hypothetical index provides strong financial returns. While the results show an exponential growth in sales since 2006, the geometric annual return of the MENA art index is a stable13.9 percent over the whole period. We conclude that investing in MENA paintings would have been profitable but also note that we examined the performance of an emerging art market that has only seen an upward trend without any correction, yet.

A Call on Art Investments (pdf) The art market has seen a sustained growth over the last years, but participation has been reserved for just a few investors. The paper proposes to overcome this problem by introducing a call option on an art index which is derived from one of the most comprehensive data sets of art market transactions. The option allows investors to optimize their exposure to art. For pricing purposes, nontradability of the art index is acknowledged, and a fundamental PDE for the option value and its closed form solution are derived, if one assumes the underlying to be correlated with an existing asset. A lower bound for the option value is also given when no such correlated asset exists.

Emerging Art Markets (pdf) This paper analyzes the performance and risk-return characteristics of three major emerging art markets: Russia, China, and India. According to three national art market indices, built by hedonic regressions based on auction sales prices, the geometric annual returns are 10.00%, 5.70%, and 42.20% for Russia (1985-2008), China (1990-2008), and India (2002-2008), respectively. The Russian art market exhibits positive correlations with most common financial assets and a positive market beta, whereas the Chinese art market demonstrates a negative correlation overall and a negative market beta, and the Indian art index reveals a negative market beta and varying correlation results. Portfolio optimization under a power utility framework suggests limited diversification potential, but with a downside beta of 0.43, investing in Chinese art offers hedging potential during financial market downswings. Investigating the linkages between art and the economy through co-integration and causality analyses proves that emerging art markets share a significant long-term relation with other financial market instruments, but the short-term relations are largely absent.

Art Price Indices (pdf) This chapter introduces many of the relevant questions regarding art market research. The first section discusses the advantages and disadvantages of several price index methodologies, such as repeat sales, hedonic indices, and hybrid models that have been used to construct art price indices. The cornerstone of any research into the art market is price data, and all price indices suffer bias because of the inherent problems in the data available on art sales. The only data readily available and made publicly accessible art art auction data. Several commercial data providers and the auction houses themselves offer access to past auctioning data, mainly through online or print channels. The most important sources, which vary in their coverage, are examined in the second section. Research on art finance and art investment has been fairly minimal, but there has been a growing body of academic papers in recent years. The third section takes a closer look at some of these studies, most of which take an investment perspective, focusing mainly on the return art generates and whether art provides an attractive alternative in a well-diversified portfolio, along with common stocks and bonds.

Time Varying Downside Risk: An Application to the Art Market (pdf) In this chapter we analyze the art market using a measure for time vari- ance in the downside risk, which reflects “bubbliness” in the market. This estimate measures the changing probability of large movements occurring in the return distribution of the historical time series of art price data. Taking such an approach and using techniques developed in extreme value theory (EVT), we are able to provide some new insight into the creation and mea- surement of risk during times of the development of bubbles in financial markets. We focus on a particularly interesting case: the art market. This market is highly media- and taste-driven, is illiquid and lacks transparency, and thus offers an ideal application in which to observe downside risk with prices that may deviate significantly from fundamental values.

Aligning Tactics with Market Capabilities in the Art World: Strategically Capitalizing on Repeat Print Sale Economies (pdf) We apply both auction-dynamics and assortment planning/revenue management lenses to study the effectiveness of repeatedly offering prints of a series for sale at various international auction houses. Theory suggests the potential for differences in the ability of auction houses to buffer sale prices against the repeat appearance of prints, hence positioning certain houses to leverage such repetition. To investigate this potential empirically we employ a fairly novel two-step analysis procedure. We start with the use of a hedonic variant of hierarchical linear modeling (HLM) to estimate the ostensibly unique capabilities of auction houses to obtain relatively high sales prices for repeated-offering print sales of specific genres of art. To account for tradeoffs associated with leveraging multiple repeated-sale capabilities for various genres, we then apply data envelopment analysis to the residuals for the internally repeated sales derived from the hedonic HLM estimation procedures. We find auction houses to generally align their offerings of recently sold print series with their own repeat sale capabilities (RSCs). We also find houses that often repeat the sale of prints internally, and possess strong repeat sale capabilities, further enjoy the prospects of operational efficiency.

Hedonic Pricing of Artworks: Evidence from German Paintings (pdf) This paper evaluates whether art might be a serious alternative to current standard asset classes like equities and bonds. We estimate the annual risk and return on German paintings, calculate what drives return on German paintings and evaluate whether German paintings can serve as a useful function in a well-diversified portfolio. This paper uses a unique data set, containing 1,688 auction price data for 23 'major' German painters over the period between January 1986 and November 2006. Hedonic regression results indicate that paintings by major German artists have yielded an annual geometric (nominal) return of merely 1.6% over this period. This paper finds that these paintings, despite their positive return and low correlation with the German equity market, should not be included in an optimal portfolio as an alternative investment and should be kept, merely, for their aesthetic return.

The German Art Market (pdf) This paper discusses various aspects of the German art market, including a brief history of German art throughout the twentieth century and the great influence of World Wars I and II. Different styles and movements, such as Expressionism (e.g. Die Brücke, Der Blaue Reiter), Neue Sachlichkeit (New Objectivity) including Dada and Bauhaus and the classification of Entartete Kunst (Degenerate Art) during the Nazi regime, will be discussed. It also elaborates on German art after World War II, including East Germany's Socialist Realism and West Germany's international influences, the influence of Conceptual Art on contemporary German art and the more recent emergence of German photography and figurative paintings of the Neue Leipziger Schule (New Leipzig School). This paper analyzes the specific characteristics of collecting and dealing as it takes place in Germany. It therefore provides a more detailed account of galleries, auction houses and art fairs, as well as a short overview of museums and exhibitions. Finally, it discusses the position of the German art market in the international market and analyses transactions and sales turnover data. It also evaluates the recent market performance of different styles and individual artists. Finally, this chapter closes with a discussion of whether art might serve as an alternative asset class, with a special focus on the first German art fund.