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
Date Written: June 25, 2015
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: Suggested Citation