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A Model of Trading in the Art Market

73 Pages Posted: 5 Mar 2014 Last revised: 18 Oct 2017

Stefano Lovo

HEC Paris - Finance Department

Christophe Spaenjers

HEC Paris - Finance Department

Date Written: September 22, 2017

Abstract

We present an infinite-horizon model of endogenous trading in the art auction market. Agents make purchase and sale decisions based on the relative magnitude of their private use value in each period. Our model generates endogenous cross-sectional and time-series patterns in investment outcomes. Average returns and buy-in probabilities are negatively correlated with the time between purchase and resale (attempt). Idiosyncratic risk does not converge to zero as the holding period shrinks. Prices and auction volume increase during expansions. Our model finds empirical support in auction data and has implications for selection biases in observed prices and transaction-based price indexes.

Keywords: art; auctions; endogenous trading; price indexes; private values; returns

JEL Classification: D44, D84, G11, G12, Z11

Suggested Citation

Lovo, Stefano and Spaenjers, Christophe, A Model of Trading in the Art Market (September 22, 2017). American Economic Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2404339 or http://dx.doi.org/10.2139/ssrn.2404339

Stefano Lovo

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Christophe Spaenjers (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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