A Model of Trading in the Art Market
73 Pages Posted: 5 Mar 2014 Last revised: 23 Sep 2018
Date Written: September 22, 2017
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
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