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Art as an investment: short and long-term comovements in major painting markets

TL;DR: In this paper, the authors examined the short and long-term price linkages among major art and equity markets over the period 1976-2001 and found that there is a stationary long-run relationship and significant short-and long run causal linkages between the various painting markets and between the equity market and painting markets.
Abstract: This paper examines the short and long-term price linkages among major art and equity markets over the period 1976-2001. The art markets examined are Contemporary Masters, French Impressionists, Modern European, 19th Century European, Old Masters, Surrealists, 20th Century English and Modern US paintings. A global equity index (with dividends and capitalisation changes) is also included. Multivariate cointegration procedures, Granger non-causality tests, level VAR and generalised variance decomposition analyses based on error-correction and vector autoregressive models are conducted to analyse short and long-run relationships among these markets. The results indicate that there is a stationary long-run relationship and significant short and long run causal linkages between the various painting markets and between the equity market and painting markets. However, in terms of the percentage of variance explained most painting markets are relatively isolated, and other painting markets are generally more important than the equity market in explaining the variance that is not caused by innovations in the market itself. This suggests that opportunities for portfolio diversification in art works alone and in conjunction with equity markets exist, though in common with the literature in this area the study finds that the returns on paintings are much lower and the risks much higher than in conventional financial markets.
Citations
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Journal ArticleDOI
TL;DR: In this article, the authors show that the risk premium of a portfolio of artworks is low compared to other risky assets and exploit this insight to explain why art is also a consumption good.
Abstract: ments, art is also a consumption good. Art owners take pleasure in its intrinsic value (e.g., for aesthetic pleasure or as a “storehouse” of an artist’s deftness ), and to the extent that it is a luxury good, they derive additional enjoyment from the signal of wealth that owning a masterpiece transmits. It is the mixture of pecuniary and nonpecuniary payoffs to ownership that makes artworks both compelling to purchase and difficult to value. I exploit this insight to explain why the measured risk premium of a portfolio of artworks is low compared to other risky assets. In a consumption-based pricing model, an asset’s risk premium is a function of the covariance of its returns with agents’ marginal utility of consump tion; agents need to be compensated if the asset pays off in a period of already high utility. As a luxury good, relative art demand is an increasing function of wealth. Therefore, positive shocks to income increase the demand, price, and returns to art in periods of high consumption utility, implying a high risk premium. This intuition is at odds with empirical studies that quantify the average financial returns of paintings relative to more traditional investment vehicles. These studies find that art 1 often underperforms relative to equities and bonds. While there have been

166 citations

Posted Content
TL;DR: In this paper, the authors used a hedonic regression model to construct a price index for Australian fine-art, and found that works executed in oils or acrylic, and those auctioned by Sotheby's or Christie's had higher prices.
Abstract: In this study, 37 605 paintings by 60 well-known Australian artists sold at auction over the period 1973–2003 are used to construct a hedonic price index The attributes included in the hedonic regression model include the name and living status of the artist, the size and medium of the painting and the auction house and year in which the painting was sold The resulting index indicates that returns on Australian fine-art averaged 7 per cent over the period with a standard deviation of 16 per cent The hedonic regression model also captures the willingness to pay for perceived attributes in the artwork, and this shows that works by McCubbin, Gascoigne, Thomas and Preston and other artists deceased at the time of auction, works executed in oils or acrylic, and those auctioned by Sotheby's or Christie's are associated with higher prices [ABSTRACT FROM AUTHOR]

90 citations

Posted Content
TL;DR: In this paper, the authors analyzed the performance and risk-return characteristics of three major emerging art markets: Russia, China, and India, and found that they share a significant long-term relation with other financial market instruments, but the short-term relations are largely absent.
Abstract: 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.

72 citations


Cites methods from "Art as an investment: short and lon..."

  • ...Worthington and Higgs (2003) use similar techniques to study the long- and shortterm dependencies among eight different schools of painters and the MSCI World Equity Index....

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Journal ArticleDOI
TL;DR: In this article, 30,227 paintings by fifty well-known modern and contemporary Australian artists sold at auction over the period 1973-2003 are used to construct a hedonic price index.
Abstract: In this note, 30,227 paintings by fifty well-known modern and contemporary Australian artists sold at auction over the period 1973–2003 are used to construct a hedonic price index. The attributes included in the hedonic regression model include the name, age and living status of the artist, the number of works sold, the size and medium of the painting, and the auction house, month and year in which the painting was sold. The results indicate that returns on Australian modern and contemporary art averaged nearly five percent over the period with a standard deviation of sixteen percent. The results also show that a ten percent increase in the Australian stock market is associated with a 3.4 percent increase in the art market. Generally, artworks by artists deceased at the time of auction, larger works, works executed in oils, and those auctioned by Sotheby's or Christies in July or August are associated with higher prices.

36 citations


Cites methods from "Art as an investment: short and lon..."

  • ...…methods have been used for calculating and analysing art returns: (i) the naïve (or arithmetic) art index method (Art Market Research 2004; Worthington and Higgs 2003; Worthington and Higgs 2004); (ii) the repeat-sales index method (Anderson 1974; Goetzmann 1993; Chanel et al. 1994;…...

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Book
18 Oct 2017
TL;DR: In this paper, the authors identify six key reasons explaining the social phenomenon that many practitioners find it so difficult to make a living in the arts by applying two acknowledged analysis tools in strategic business management.
Abstract: This study identifies six key reasons explaining the social phenomenon that many practising fine artists find it so difficult to make a living in the arts. Due to a marked paucity of research explaining this social phenomenon, the study at hand investigates the internal factors related to artists’ personality, motivation, and skills as well as various external factors influencing artists’ working and business environment by applying two acknowledged analysis tools in strategic business management. The literature findings highlight four external threat factors mainly responsible for a very challenging working and business environment affecting practising fine artists’ chances of professional success. Consequently, two internal factors – notably artists’ motivation and ambition to conduct business and a living in the arts as well as their developed skills – turn out to be key factors to successfully deal with these external threat factors. In this context, three research aims related to practising artists’ professional education and preparation arise: the identification of crucial skills to successfully make a living in the arts as practising artists, the status of their professional education at higher education institutions (HEIs), and the capability of arts incubators as alternative education programmes to prepare large numbers of practising fine artists for professional success. The approach to investigation is exploratory and inductive with a cross-sectional survey strategy. To identify the crucial skills for professional success in the arts, surveys of up to 219 fine art lecturers, 168 fine art undergraduates, and 149 commercial galleries are conducted. To report on the status of fine artists’ educational preparation, 87 undergraduate degree programmes, 55 post-graduate programmes, and 46 extracurricular training offerings at HEIs are investigated. The study focuses mainly on the UK and Germany. These countries are selected due to their significantly different market sizes and reputation for the purpose of identifying differences in market challenges and professional preparations faced by fine artists. To analyse arts incubators’ capability in preparing large numbers of practising fine artists for a professional career, 92 arts incubation programmes around the globe are analysed and nine structured interviews with practising fine artists are conducted. The investigation of the crucial skills for fine artists’ professional success highlights in particular the development of an entrepreneurial mindset as well as of seven skills. Research on arts education shows evidence that fine art graduates are hardly equipped with this skillset and mindset due to HEIs’ lack of focus on the professional careers of practising artists. The analysis of arts incubation programmes illustrates serious limitations in supporting larger numbers of practising fine artists in their professional endeavours. The research findings stimulate the discussion in, and contribute to, knowledge in the fields of artists’ professional preparation, arts entrepreneurship, and the redesigning of fine art curriculum to purposefully prepare fine art graduates for an entrepreneurial and professional career as practising artists.

33 citations

References
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Journal ArticleDOI
TL;DR: The relationship between co-integration and error correction models, first suggested in Granger (1981), is here extended and used to develop estimation procedures, tests, and empirical examples.
Abstract: The relationship between co-integration and error correction models, first suggested in Granger (1981), is here extended and used to develop estimation procedures, tests, and empirical examples. If each element of a vector of time series x first achieves stationarity after differencing, but a linear combination a'x is already stationary, the time series x are said to be co-integrated with co-integrating vector a. There may be several such co-integrating vectors so that a becomes a matrix. Interpreting a'x,= 0 as a long run equilibrium, co-integration implies that deviations from equilibrium are stationary, with finite variance, even though the series themselves are nonstationary and have infinite variance. The paper presents a representation theorem based on Granger (1983), which connects the moving average, autoregressive, and error correction representations for co-integrated systems. A vector autoregression in differenced variables is incompatible with these representations. Estimation of these models is discussed and a simple but asymptotically efficient two-step estimator is proposed. Testing for co-integration combines the problems of unit root tests and tests with parameters unidentified under the null. Seven statistics are formulated and analyzed. The critical values of these statistics are calculated based on a Monte Carlo simulation. Using these critical values, the power properties of the tests are examined and one test procedure is recommended for application. In a series of examples it is found that consumption and income are co-integrated, wages and prices are not, short and long interest rates are, and nominal GNP is co-integrated with M2, but not M1, M3, or aggregate liquid assets.

27,170 citations

Journal ArticleDOI
TL;DR: In this article, the cross spectrum between two variables can be decomposed into two parts, each relating to a single causal arm of a feedback situation, and measures of causal lag and causal strength can then be constructed.
Abstract: There occurs on some occasions a difficulty in deciding the direction of causality between two related variables and also whether or not feedback is occurring. Testable definitions of causality and feedback are proposed and illustrated by use of simple two-variable models. The important problem of apparent instantaneous causality is discussed and it is suggested that the problem often arises due to slowness in recording information or because a sufficiently wide class of possible causal variables has not been used. It can be shown that the cross spectrum between two variables can be decomposed into two parts, each relating to a single causal arm of a feedback situation. Measures of causal lag and causal strength can then be constructed. A generalisation of this result with the partial cross spectrum is suggested.

16,349 citations


"Art as an investment: short and lon..." refers methods in this paper

  • ...In order to examine the short-run relationships, Granger (1969) noncausality tests are specified....

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Journal ArticleDOI
TL;DR: In this paper, the estimation and testing of long-run relations in economic modeling are addressed, starting with a vector autoregressive (VAR) model, the hypothesis of cointegration is formulated as a hypothesis of reduced rank of the long run impact matrix.
Abstract: The estimation and testing of long-run relations in economic modeling are addressed. Starting with a vector autoregressive (VAR) model, the hypothesis of cointegration is formulated as the hypothesis of reduced rank of the long-run impact matrix. This is given in a simple parametric form that allows the application of the method of maximum likelihood and likelihood ratio tests. In this way, one can derive estimates and test statistics for the hypothesis of a given number of cointegration vectors, as well as estimates and tests for linear hypotheses about the cointegration vectors and their weights. The asymptotic inferences concerning the number of cointegrating vectors involve nonstandard distributions. Inference concerning linear restrictions on the cointegration vectors and their weights can be performed using the usual chi squared methods. In the case of linear restrictions on beta, a Wald test procedure is suggested. The proposed methods are illustrated by money demand data from the Danish and Finnish economies.

12,449 citations


"Art as an investment: short and lon..." refers methods in this paper

  • ...A useful statistical test for determining the cointegrating rank r is proposed by Johansen (1991) and Johansen and Juselius (1990)....

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Book ChapterDOI
01 Jan 2001
TL;DR: In this article, it is shown that the cross spectrum between two variables can be decomposed into two parts, each relating to a single causal arm of a feedback situation, and measures of causal lag and causal strength can then be constructed.
Abstract: There occurs on some occasions a difficulty in deciding the direction of causality between two related variables and also whether or not feedback is occurring. Testable definitions of causality and feedback are proposed and illustrated by use of simple two-variable models. The important problem of apparent instantaneous causality is discussed and it is suggested that the problem often arises due to slowness in recordhag information or because a sufficiently wide class of possible causal variables has not been used. It can be shown that the cross spectrum between two variables can be decomposed into two parts, each relating to a single causal arm of a feedback situation. Measures of causal lag and causal strength can then be constructed. A generalization of this result with the partial cross spectrum is suggested.The object of this paper is to throw light on the relationships between certain classes of econometric models involving feedback and the functions arising in spectral analysis, particularly the cross spectrum and the partial cross spectrum. Causality and feedback are here defined in an explicit and testable fashion. It is shown that in the two-variable case the feedback mechanism can be broken down into two causal relations and that the cross spectrum can be considered as the sum of two cross spectra, each closely connected with one of the causations. The next three sections of the paper briefly introduce those aspects of spectral methods, model building, and causality which are required later. Section IV presents the results for the two-variable case and Section V generalizes these results for three variables.

11,896 citations