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

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Listed:
  • Roman Kraussl

    ()

  • Arthur Korteweg
  • Patrick Verwijmeren

    (LSF)

Abstract

This paper shows the importance of correcting for sample selection when investing in illiquid assets with endogenous trading. Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns. The selection-corrected average annual index return is 7 percent, down from 11 percent for traditional uncorrected repeat-sales regressions, and Sharpe Ratios drop from 0.4 to 0.1. From a pure financial perspective, passive index investing in paintings is not a viable investment strategy, once selection bias is accounted for. Our results have important implications for other illiquid asset classes that trade endogenously. "Keywords: ""Art investing; Selection bias; Asset allocation"""

Suggested Citation

  • Roman Kraussl & Arthur Korteweg & Patrick Verwijmeren, 2013. "Does it Pay to Invest in Art? A Selection-corrected Returns Perspective," LSF Research Working Paper Series 13-7, Luxembourg School of Finance, University of Luxembourg.
  • Handle: RePEc:crf:wpaper:13-7
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    File URL: http://wwwen.uni.lu/content/download/63920/807060/file/Binder7_Does%20it%20Pay%20to%20Invest%20in%20Art_A%20Selection-corrected%20Returns%20Perspective_July%202013.pdf
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Reported returns on investment for artwork are too high
      by Economic Logician in Economic Logic on 2014-01-08 21:33:00

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    Cited by:

    1. Adams, Renée & Kräussl, Roman & Navone, Marco & Verwijmeren, Patrick, 2018. "Is gender in the eye of the beholder? Identifying cultural attitudes with art auction prices," CFS Working Paper Series 595, Center for Financial Studies (CFS).
    2. Coslor, Erica & Spaenjers, Christophe, 2016. "Organizational and epistemic change: The growth of the art investment field," Accounting, Organizations and Society, Elsevier, vol. 55(C), pages 48-62.
    3. Aye, Goodness C. & Gil-Alana, Luis A. & Gupta, Rangan & Wohar, Mark E., 2017. "The efficiency of the art market: Evidence from variance ratio tests, linear and nonlinear fractional integration approaches," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 283-294.
    4. William Goetzmann & Elena Mamonova & Christophe Spaenjers, 2014. "The Economics of Aesthetics and Three Centuries of Art Price Records," NBER Working Papers 20440, National Bureau of Economic Research, Inc.
    5. repec:ris:apltrx:0324 is not listed on IDEAS
    6. Whitaker, Amy & Kräussl, Roman, 2018. "Blockchain, fractional ownership, and the future of creative work," CFS Working Paper Series 594, Center for Financial Studies (CFS).
    7. Laurs, DK & Renneboog, Luc, 2018. "My Kingdom for a Horse (or a Classic Car)," Discussion Paper 2018-037, Tilburg University, Center for Economic Research.

    More about this item

    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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