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

46 Pages Posted: 22 Oct 2013

See all articles by Arthur G. Korteweg

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Roman Kräussl

Luxembourg School of Finance; Hoover Institution, Stanford University

Patrick Verwijmeren

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

Date Written: October 22, 2013

Abstract

This paper shows the importance of correcting for sample selection when investing in illiquid assets with endogenous trading. Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns. The selection-corrected average annual index return is 6.5 percent, down from 10 percent for traditional uncorrected repeat sales regressions, and Sharpe Ratios drop from 0.24 to 0.04. From a pure financial perspective, passive index investing in paintings is not a viable investment strategy once selection bias is accounted for. Our results have important implications for other illiquid asset classes that trade endogenously.

Keywords: Art investing, Selection bias, Asset allocation

JEL Classification: D44, G1, Z11

Suggested Citation

Korteweg, Arthur G. and Kraeussl, Roman and Verwijmeren, Patrick, Does it Pay to Invest in Art? A Selection-Corrected Returns Perspective (October 22, 2013). Available at SSRN: https://ssrn.com/abstract=2343764 or http://dx.doi.org/10.2139/ssrn.2343764

Arthur G. Korteweg (Contact Author)

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

Luxembourg School of Finance ( email )

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

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

Hoover Institution, Stanford University ( email )

Stanford, CA 94305
United States

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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