A Model of Trading in the Art Market

Abstract

We present an infinite-horizon model of endogenous trading in the art auction market. Agents make purchase and sale decisions based on the relative magnitude of their private use value in each period. Our model generates endogenous cross-sectional and time-series patterns in investment outcomes. Average returns and buy-in probabilities are negatively correlated with the time between purchase and resale (attempt). Idiosyncratic risk does not converge to zero as the holding period shrinks. Prices and auction volume increase during expansions. Our model finds empirical support in auction data and has implications for selection biases in observed prices and transaction-based price indexes. (JEL C43, D44, E32, Z11)

'We'll Always Have Paris': Out-of-Country Buyers in the Housing Market

“…Can changes in home-country economic conditions explain some of the country-level variation in non-resident purchase volumes in Paris? Inspired by the literature modeling demand for luxury durable assets (e.g., Aït-Sahalia et al, 2004;Goetzmann et al, 2011;Lovo and Spaenjers, 2018), we look into the explanatory power of measures that should be correlated with potential buyers' purchasing power.…”

Speculative Trading and Bubbles: Evidence from the Art Market

“…To mitigate concerns of reverse causality, we show that, on average, a buyer earns lower returns if the item was previously held over a short period of time (e.g., it was flipped). However, the apparent outperformance reverses when taking into account realistic transaction costs in contrast to the model prediction of Lovo and Spaenjers (2018). Furthermore, the returns of shortterm transactions are much more volatile than those of long-term transactions.…”

“…In the models of speculative trading that we sketched, speculators play a destabilizing role, but many models assume the contrary. Lovo and Spaenjers (2018), in particular, propose that art speculators are a stabilizing force in bad times. We, thus, investigate if short-term transactions reflect the trade of informed or, at least, sophisticated investors who could play a stabilizing role.…”

“…Goetzmann et al (2011) document long-run relations between art prices and top incomes and wealth. Lovo and Spaenjers (2018) propose a dynamic auction model in which rational agents trade art. Their model predicts that prices and volume increase in good times when demand fundamentals are strong.…”

Art return rates from old master paintings to contemporary art

“…It would be interesting to test the impact of other artists' characteristics on returns, such as the year when artworks were executed and the age of artist (emphasized byGalenson and Weinberg, 2001, and Galenson, 2002, 2006, but our dataset does not provide sufficient information for this.24 It is well known that a record sale of new works by Damien Hirst took place at Sotheby's on September 15, 2008, the same day in which Lehman Brothers went bankrupt. Things changed radically after that (seeHorowitz, 2011).25 This is in contrast with findings byLovo and Spaenjers (2018) who emphasize a negative correlation between residuals of a repeated sales regression and the holding period. The difference may be due to the fact that our sample covers a larger number of repeated sales.…”