The Efficiency of the Art Market: Evidence from Variance Ratio Tests, Linear and Nonlinear Fractional Integration Approaches

This paper investigates the weak-form efficiency hypothesis for the art market. We consider 15 art price indices namely: Contemporary, Drawings, France, Global index (Euro), Global index (USD), Modern art, Nineteenth century, Old Masters, Paintings, Photographies, Postwar, Prints, Sculptures, UK and US. We use quarterly data from 1998:1 to 2015: 1. We employ both standard and non-parametric single and joint variance ratio tests while accounting for small sample bias through the use of the wild bootstrapping. We show that the majority of the art market price indices are inefficient with the exception of the Old Masters that consistently prove efficient under both individual and joint tests. Also we cannot reject the null hypothesis of random walk or martingale for Contemporary, US and UK indices albeit not as strong as Old Masters suggesting that these three art indices are less predictable. Our results imply that future price movements in Old Masters, and to some extent in Contemporary, US and UK indices are determined entirely by information not contained in the price series whereas the remainder of the indices can be predicted using price information. However, confronting the data with both linear and nonlinear long memory models, we observe the following series can have unit roots: Paints, Prints, Photographies, Nineteenth century, Modern Art, US, France and Drawings and their markets are therefore efficient to a certain point. Post war, Sculpture, Drawings, France, Contemporary and France have values of the fractional parameter d significantly different from 0 and 1. The US and Contemporary art markets are indisputably efficient based on both long memory and variance ratio tests.