Buying Beauty: On Prices and Returns in the Art Market

Abstract

This paper investigates the evolution of prices and returns in the art market since the middle of the previous century. We first compile a comprehensive list of more than 10,000 artists and then build a dataset that contains information on more than 1.1 million auction sales of paintings, prints, and works on paper. We perform an extensive hedonic regression analysis that includes unique price-determining variables capturing amongst others: the artist's reputation, the strength of the attribution to an artist, and the subject matter of the work. Based on the resulting price index, we conclude that art has appreciated in value by a moderate 4.03% per year, in real USD terms, between 1951 and 2007. During the art market boom period 2002-2007, prices augmented by 11.60% annually, which explains the increased attention to 'art as an investment'. Furthermore, our results show that, over the last quarter of a century, prices of oil paintings and of post-war art have risen faster than the overall market. In contrast to earlier studies, we find evidence of a positive masterpiece effect: high-quality art makes a better investment. Our results are robust to alternative model specifications, and do not seem influenced by sample selection or survivorship biases. When comparing the long-term returns on art to those on financial assets, we find that art has underperformed stocks but outperformed bonds. However, between 1982 and 2007, bonds yielded higher average returns (at a lower risk) than art. Buyers of art should thus expect to reap non-pecuniary benefits rather than high financial returns, especially because the modest art returns are further diminished by substantial transaction costs. BUYING BEAUTY: ON PRICES AND RETURNS IN THE ART MARKET AbstractThis paper investigates the evolution of prices and returns in the art market since the middle of the previous century. We first compile a comprehensive list of more than 10,000 artists and then build a dataset that contains information on more than 1.1 million auction sales of paintings, prints, and works on paper. We perform an extensive hedonic regression analysis that includes unique price-determining variables capturing amongst others: the artist's reputation, the strength of the attribution to an artist, and the subject matter of the work. Based on the resulting price index, we conclude that art has appreciated in value by a moderate 4.03% per year, in real USD terms, between 1951 and 2007. During the art market boom period 2002-2007, prices increased by 11.60% annually, which explains the heightened attention to 'art as an investment'. Furthermore, our results show that, over the last quarter of a century, prices of oil paintings and of post-war art have risen faster than the overall market. In contrast to earlier studies, we find evidence of a positive masterpiece effect: high-quality art makes a better investment. Our results are robust to alternative model specifications, and do not seem influenced by sample selection or survivorship biases. When comparing ...

Is there a bubble in the art market?

“…The market is highly segmented and dominated by a few large auction houses, and only a small number of works are 3 Art is not only sold in auction but also privately, for example through dealers. Renneboog and Spaenjers (2013) note that it is generally accepted that auction prices set a benchmark that is also used in the private market. 4 An artwork is "bought in" when the highest bid does not reach the reserve price, and the artwork goes unsold.…”

“…They reason this conclusion by assuming that the more established and famous auction houses will offer the 'best' work, while the less familiar and smaller ones will have less quality paintings (see also, Renneboog and Spaenjers, 2013). We assign those auction houses a separate dummy variable, i.e., a value of one indicates that the painting was auctioned by one of the leading auction houses: Christie's London or New York and Sotheby's London or New York.…”

A Calculation Method of the Artwork Portfolio Investment Risk Based on the Hedonic Model

“…In the study of the artwork price model, the classic Hedonic regressive model is a semi-log model [15], which can be expressed as following: …”

“…Taylor constructed the price index of Australian aboriginal artwork by Hedonic price index and found that the high artwork yield is about 2% less than other artworks [14]. In addition, Renneboog et al analyzed and improved the Hedonic index method and applied it into the pricing, investment, and analysis of artwork market [15]- [18]. Nowadays, the Hedonic index method had gained a lot of achievements in the artwork pricing and investment.…”

Discoveries of fakes: Their impact on the art market

“…In most hedonic regressions, authenticity dummies carry positive signs whereas indications that the artworks are not from the master himself carry negative signs. According to Renneboog and Spaenjers (2009) "whenever an attribution dummy comes into play, the average price level drops by more than 50%". Once fakes are discovered they are usually immediately removed from the market.…”