Collectibles as Alternative Investments

114 Pages Posted: 26 Nov 2010

See all articles by Péter Erdos

Péter Erdos

Budapest University of Technology and Economics

Date Written: November 25, 2010

Abstract

Applying variance ratio tests, we measure the size of the random walk component in US art auction prices. The results show that the US art prices have large transitory component which accounts for 72% of the variance of the returns. Due to the large stationary component, the random walk hypothesis of the art prices can be rejected. The components are time-varying due to structural breaks; since 1935 the random walk hypothesis along with the weak-form efficiency cannot be rejected. There are more causes of time-varying components; on the one hand, pre-1935 the data are sparse and the estimation of the fine art index is not so precise as only a few auctions have been recorded and on the other hand, institutional changes occurred on the capital markets after World War II and ultimately, price estimates were introduced in 1973. Based on mean square errors, the Cochrane (1988) method is optimal outperforming the frequently used kernel based estimators.

We investigate fine wines from an investment theory point of view using Liv-ex indexes. The ARMA spectral weak-form efficiency tests show mixed results. The weak-form efficiency of a portfolio of a typical wine investor cannot be rejected; however, that of other portfolios can be. The violation of the efficiency could result in arbitrage opportunities but this result is not supported by the equilibrium asset pricing models. The performance of “master wines” (defined as the most expensive fine wines) is not significantly different from that of the whole market; that is, the underperformance of masterpieces can be rejected. Investment grade wines can have a significant role in portfolio diversification since they exhibit low correlation with the stock market and the two markets are independent in the long run.

The role in diversification is strengthened by the fact that fine wines reserve their values even during recessions and they can be thought of as safe havens. We investigate Baedeker guidebooks in their English, French and German versions issued between 1828 and 1945 using an estimated repeat sales regression (RSR) index. Baedeker guidebooks commove along a common factor. The underperformance of masterpieces (the most expensive guidebooks) cannot be shown. “Masters” do not underperform the Baedeker market as a whole and they do not exhibit abnormal performance under the CAPM or the Fama-French three-factor model. The law of one price is not breached; however, there is a slightly significant difference in price levels between the USA and Continental Europe. On the other hand, it can be explained partly by estimation errors and partly by the composition of the market. Based on equilibrium models, the efficiency of the guidebook market cannot be rejected.

Keywords: Collectibles, Alternative Investments, Market Efficiency

JEL Classification: D46, D44, G12, G14, C14

Suggested Citation

Erdos, Péter, Collectibles as Alternative Investments (November 25, 2010). Available at SSRN: https://ssrn.com/abstract=1715083 or http://dx.doi.org/10.2139/ssrn.1715083

Péter Erdos (Contact Author)

Budapest University of Technology and Economics ( email )

Budafoki ut 8.
Budapest, 1111
Hungary

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