Amsterdam Art Prices: A Long Run Art Index Abstract: Investment in art is a novel but increasingly popular area of finance. The art market is currently booming; however little is known on the price development over time and the relative importance of characteristics attributable to artworks. Using a hybrid model which includes hedonic variables on repeat sales data on fine art sold at auctions in Amsterdam over the last 36 years we have created a unique index for art prices in the Continental European art market dating back to 1900. Given the heterogeneity of artworks we find that art price indices are greatly improved by the addition of hedonic variables in the repeat sales regression estimation. Furthermore we assess the importance of a diversified art investment as an additional alternative asset in the investment portfolio.

Constructing the True Art Market Index (pdf) Abstract: This study develops a novel 2-step hedonic approach, which is used to construct a price index for German paintings. This approach enables the researcher to use every single auction record, instead of only those auction records that belong to a sub-sample of selected artists. This results in a substantially larger sample available for research and it lowers the selection bias that is inherent in the traditional hedonic and repeat sales methodologies. Using a unique sample of 61,135 auction records for German artworks created by 5,115 different artists over the period 1985 to 2007, we find that the geometric annual return on German art is just 3.8 percent, with a standard deviation of 17.87 percent. Although our results indicate that art underperforms the market portfolio and is not proportionally rewarded for downside risk, under some circumstances art should be included in an optimal portfolio for diversification purposes.

Art and the Economy: Long and Short-Term Relationships between Investing in Art and Financial Markets Abstract: This study examines long and short-term relations between the global art market and financial markets and indicators of economic activity. This analysis is based on the estimation of a hedonic price index for which a large dataset is used that includes 38,746 paintings by 100 well known artists sold at auction over the period 1956 to 2006. Johansen cointegration tests and Granger causality tests based on vector error correction and vector auto regressive models are proposed and conducted to test for long and short-term price linkages between these markets and indicators. These possible linkages are of interest because they may help to explain price formation in the art market. The results show that no long-term linkages exist between the art market and financial markets and economic indicators. However, various significant short-term causal linkages are found. The endogeneity of global art market has clear implications for speculators interested in investing in the art market.

The German Art Market (pdf) Abstract: 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. 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.

Hedonic Pricing of Artworks: Evidence from German Paintings (pdf) Abstract: 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.

Art Price Return Indices (working paper) Abstract: Investment in art is a novel but increasingly popular are of international finance. The art market is currently booming; however little is known on price development over time and the relative importance of characteristics attributable to artworks, such as the type of artist, the medium of the painting. Using a hybrid model which includes hedonic variables on repeat sales data on fine art sold at auction in Amsterdam from 1970-2006 we have created a unique index for art prices in the Continental European art market for over a century. Given the heterogeneity of artworks we find that art price indices are greatly improved by the addition of hedonic variables in the repeat sales regression estimation. Furthermore we assess the importance of a diversified art investment as an additional alternative asset in the investment portfolio.

Is There a documenta Effect? An Empirical Analysis of Sales Volume and Auction Prices of Invited Artists (working paper) Abstract: The documenta is one of the world’s most important exhibitions of modern and contemporary art, which takes place every five years in Kassel, Germany. This paper evaluates whether paintings of the invited artists on the documenta experienced a substantial upward trend in terms of sales volume and prices. A unique dataset was composed, the selection of 198 painters resulted in more than 4,000 auction records of oil paintings sold between January 1952 and June 2006. Besides the construction of naïve indices based on average and median prices, hedonic price regression was used to obtain the price of a "standard painting" by correcting the auction prices for general, location-related, and physical characteristics of the painting. Between 3.5 years before and 3.5 years after the documenta exhibitions the return of the documenta index yielded an annual nominal geometric return of 7.98%. More interesting from the perspective of an investor is the return of the 3.5 year period after the exhibitions. This period yielded an annual nominal geometric return of 11.69%. Our general conclusion is that the sales volume and auction prices of invited artists experienced substantial upward effects, which makes it possible to gain positive nominal returns for a diversified portfolio of paintings.

Art Price Indices - A Comparative Study on Price Index Methods (working paper) Abstract: This paper discusses the advantages and disadvantages of several price index methodologies which can be used to construct art price indices. The hybrid model as used in the real estate literature is theoretically the best method to construct indices since it combines the advantages of two alternative methods: the repeat-sales and the hedonic approach. However, empirical results in previous literature are mixed and are hard to be compared with another. Despite that there is no consensus about the most suitable approach, there seems to be one overall similarity between comparative empirical research on the construction on art price indices: none of them considers the repeat sales estimator as the most preferable approach. We argue that since the suitability of a particular approach depends both on the sample used and the aim of the research, it seems that the most suitable art index can not be determined a priori. Hence the suitability of a methodology should be determined on a case by case basis. We recommend as a way of robustness checking to use different approaches and to construct multipe art price indices.

Investing in Chinese Contemporary Art - A New Hot Asset Class? (working paper) Abstract: This paper investigates the risk-return profile of Chinese contemporary art investments in comparison with traditional financial assets classes like equity and bonds. Painters are selected with reference to the Chinese Contemporary Painters published by China Central News Documentary Film Producer (www.chinaartists.net) which records 98 most important and influential contemporary artists. We build a hedonic pricing model in order to strip the characteristics of sold paintings including medium, size, signature, sale date, sale location, and probe for the “standard” prices of Chinese contemporary paintings. We hypothesize that due to the recent boom in Chinese contemporary art and its relatively low correlation with traditional financial markets, the inclusion of Chinese contemporary art pieces in a well-diversified stock and bond portfolio will have a positive effect.

Time Varying Downside Risk: An Application to the Art Market (working paper) Abstract: Behavioral aspects and the influence of the media on tastes and trends play a significant role on the price discovery process in the art market. Prices in the art market are therefore much more likely to deviate from fundamental values than in other financial markets. This provides a highly interesting case for documenting and analyzing the bubble which occurred in the art market in the 1990's. In this chapter we use the Tail Index Estimator, derived from applications in Extreme Value Theory to see how the probability of large movements, occurring during the development and the burst of the art price bubble can help to track and estimate the degree of so-called bubbliness occurring in financial markets.

Profits and Pleasure in Art (working paper) Abstract: This paper investigates the influence of the diversity of the buyer population on the art market. Given the current struggle of art funds, it is hypothesized that financial investors will increasingly pull out of the art market. Buyer groups and relevant research findings regarding efficiency, diversification benefits and return on investment are analysed. Scenario planning forms the basis of analysis. We argue that the art market is moving toward a more financial investment rationale. Nonetheless, the investment potential solely for profit maximization is yet highly questionable. However, new cooperation’s incentives such as sponsoring of museums by businesses are positively influencing the investment potential of arts.

An Explanation of the Profitability of Artists through a Web-based Occurrence Performance Analysis (working paper) Abstract: With more and more investors turning to art as an alternative asset class and a store of long-term value it is important to find reliable performance indicators. The influence of different media on tastes and trends plays an important role on the art market process of price building. This paper constructs a new indicator for the prediction of the return of investments of artworks on contemporary art and describes a method for analyzing internet traffic data and how to use this data to predict the (financial) performance of individual artists. We demonstrate our approach on a dataset containing 35 artists from 20 different movements.

Is Art a Profitable Investment? (working paper) Abstract: This paper investigates the risk and return characteristics of different art movements over the period 1998 to 2006. In particular, it analyzes the possibilities of portfolio optimization by investing in Abstract Art, Baroque, Barbizon, Bauhaus, Cobra, Cubism, Expressionism, Fluxus, Futurism, Impressionism, Pop Art, Realism, Rococo, and Surrealism, and compares it with investments in stocks, bonds, hedge funds, and real estate funds of the US and the UK market. We show that some art movements outperform the financial asset returns although with a higher risk. The correlations between art movements and the financial assets are very low or even negative, indicating possibilities of portfolio diversification.

Art as an Alternative Asset Class - The Performance and Influence of Art (working paper) Abstract: This paper builds two indices, the Modern Art 100 and the Old Masters 100, to evaluate whether investing in art can be distinguished as a serious alternative investment class. For both indices, the annual returns (and risks) are measured and compared with the S&P 500. In addition, the indices are placed in the computation of a mean-variance frontier together with conventional and alternative investment classes, i.e. equity indices, hedge funds, government bonds, private equity, commodities, real estate, and US T-Bills. For this paper, a dataset of 19,773 auction prices for the Modern Art 100, and 7,012 auction prices for the Old Masters 100 were collected over the period January 1985 to March 2007. By using hedonic regression the annual geometric returns of both indices were estimated. The Modern Art 100 had an average annual return of 8.7% over 1985 until 2007, and the Old Masters 100 yielded an average annual return of 3.9% (both results are nominal geometric results). When placing the art indices (hedonic and AMR) in a mean-variance frontier it can be noticed that only the lower half of the frontier is affected by the indices, and in an optimal portfolio only 0.35% of the portfolio consist of art indices (and only the hedonic art indices). Therefore, this paper concludes that investing in art should not be done purely for its monetary return, but moreover for its aesthetic return.

An Empirical Investigation of the Top 100 Photography Index (working paper) Abstract: