Does It Pay to Invest in Art? A Selection-Corrected Returns Perspective
Arthur G. Korteweg
University of Southern California - Marshall School of Business
Universite du Luxembourg - School of Finance; Emory University - Goizueta Business School
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
June 25, 2015
Review of Financial Studies, Forthcoming
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 cuts average annual index returns from 8.7 percent to 6.3 percent, 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 topselling artists may add value. The methodology extends naturally to other asset classes.
Number of Pages in PDF File: 72
Keywords: Art investing, Alternative Assets, Selection bias, Illiquidity, Portfolio Choice, Asset Allocation, MCMC
JEL Classification: D44, G11, Z11
Date posted: June 17, 2013 ; Last revised: August 15, 2015
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