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Does it Pay to Invest in Art? A Selection-Corrected Returns Perspective

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  • Arthur Korteweg
  • Roman Kräussl
  • Patrick Verwijmeren

Abstract

This paper shows the importance of correcting for sample selection when investing in illiquid assets that trade endogenously. Using a sample of 32,928 paintings that sold repeatedly between 1960 and 2013, we find an asymmetric V-shaped relation between sale probabilities and returns. Adjusting for the resulting selection bias reduces average annual index returns from 8.7% to 6.3%, lowers Sharpe ratios from 0.27 to 0.11, and materially impacts portfolio allocations. Investing in a broad portfolio of paintings is not attractive, but targeting specific styles or top-selling artists may add value. The methodology naturally extends to other asset classes. Received October 18, 2013; accepted August 4, 2015 by Editor Andrew Karolyi.

Suggested Citation

  • Arthur Korteweg & Roman Kräussl & Patrick Verwijmeren, 2016. "Does it Pay to Invest in Art? A Selection-Corrected Returns Perspective," The Review of Financial Studies, Society for Financial Studies, vol. 29(4), pages 1007-1038.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:4:p:1007-1038.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhv062
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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G1 - Financial Economics - - General Financial Markets
    • Z11 - Other Special Topics - - Cultural Economics - - - Economics of the Arts and Literature

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