Speculative Trading and Bubbles: Evidence from the Art Market

We argue that extrapolative expectations drive boom–bust cycles in the postwarart market. Price run-ups coincide with increases in demand fundamentals but are fol-lowed by predictable busts. Predictable changes account for about half of the variance offive-year price changes. High prices coincide with many attributes of speculative bubbles:trading volume, the share of short-term trades, the share of postwar art, and volatility areall higher during booms. In addition, short-term transactions underperform long-termtransactions. Survey evidence further confirms the link between beliefs, prices, and volumedynamics as in models in which extrapolative beliefs fuel speculative bubbles.