Art as an Investment

During the 1970s and 1980s, the art markets gave abnormal returns. Individuals
started speculating on art prices, and institutional investors soon entered the
scene. Economists then began evaluating this new alternative asset class. In this
thesis, we review global art markets, analyze the methodologies employed for
studying art as an investment, and seek answers to some fundamental questions.
To build solid conclusions, we developed the largest up-to-date dataset of repeat
sales of art objects. Our main additional contributions to the literature can be
summarized as follows. First, we review and explain the growth in international
art markets. Second, we show that it is unreasonable to make a comparison
between the two main methodologies used for studying the investment
perspective of art: the repeat-sales and hedonic regression frameworks. The
returns estimated using the hedonic approach depend greatly on the specifications
of the model. Thus, we find that of the two, the repeat-sales models are the most
robust. Third, we study the returns on art after accounting for transaction costs.
Importantly, we show that taking this fair view renders impractical the widely
used art-investment measurement methodologies. Fourth, we revisit the
“masterpiece effect”, and find strong evidence supporting its existence. Fifth, we
investigate the potential of art investment. We find that the inclusion of art in an
optimal portfolio depends significantly on the abnormal returns seen in the 1980s.
Omitting these years leads to its exclusion. However, art may add a diversification
benefit to an investment portfolio due to its low-to-negative correlation with other
asset classes. Sixth, we analyze the optimal holding period of art and find that, in
general, the returns increase with the length of the holding period. Nevertheless,
we observe significant returns, accompanied with high levels of volatility, for
trades made over very short time horizons. We notice that this “flipping” practice
has been increasing in recent decades. Finally, we consider the effect some special
cases have on art investment returns. We find that artworks that trade frequently
tend not to outperform the market. Moreover, the nature of an artwork’s
ownership history doesn’t alter returns. We also examine the returns on artworks
selected by experts, and find that, surprisingly, they underperform.