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

Review of Financial Studies, Vol. 29, No. 4, 2016

72 Pages Posted: 17 Jun 2013 Last revised: 12 Jan 2017

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Roman Kräussl

Luxembourg School of Finance; Emory University - Goizueta Business School

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: June 25, 2015

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 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.

Keywords: Art investing, Alternative Assets, Selection bias, Illiquidity, Portfolio Choice, Asset Allocation, MCMC

JEL Classification: D44, G11, Z11

Suggested Citation

Korteweg, Arthur G. and Kräussl, Roman and Verwijmeren, Patrick, Does It Pay to Invest in Art? A Selection-Corrected Returns Perspective (June 25, 2015). Review of Financial Studies, Vol. 29, No. 4, 2016. Available at SSRN: https://ssrn.com/abstract=2280099 or http://dx.doi.org/10.2139/ssrn.2280099

Arthur G. Korteweg

University of Southern California - Marshall School of Business ( email )

3670 Trousdale Parkway
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~korteweg/

Roman Kraeussl (Contact Author)

Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246
Luxembourg
+3524666445442 (Phone)

HOME PAGE: http://www.art-finance.com

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
+14042812253 (Phone)
+14047275238 (Fax)

HOME PAGE: http://www.art-finance.com

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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