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Don’t let the easy be the enemy of the good. Returns from art investments: What is wrong with it?

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  • Vecco, Marilena
  • Zanola, Roberto

Abstract

Although geometric hedonic price indexes are widely used in the hedonic literature on non-standard investments, it is well known that portfolios of assets have values that are related to the arithmetic, not geometric, average of prices. This paper explores the implications of the use of arithmetic hedonic price indexes for art investments. Log-linear predictions are retransformed back to the original scale by performing a modified version of the Duan’s smearing factor. This procedure is illustrated with an analysis of the returns from 10,459 Surrealist paintings sold worldwide during the pre-crisis period 1990–2007. Findings show significant differences between the arithmetic versus geometric price indexes, while emphasising the caution that should be exercised in interpreting the hedonic index prices of non-standard investments as they are typically computed for academic and business applications.

Suggested Citation

  • Vecco, Marilena & Zanola, Roberto, 2017. "Don’t let the easy be the enemy of the good. Returns from art investments: What is wrong with it?," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 120-129.
  • Handle: RePEc:eee:jeborg:v:140:y:2017:i:c:p:120-129
    DOI: 10.1016/j.jebo.2017.05.009
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    References listed on IDEAS

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    Keywords

    Retransformation; Dutot price index; Jevons price index; Non-standard investments; Hedonic prices;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D2 - Microeconomics - - Production and Organizations
    • Z1 - Other Special Topics - - Cultural Economics

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