The Capital Asset Pricing Model (CAPM) Applied to Paintings

Abstract

The Capital Asset Pricing Model (CAPM) has been used in a number of studies to explore the features of the art market (or individual artists). We claim that such studies have been based on unsuitable estimates of art market returns in the context of the CAPM methodology. The CAPM calls for employing total returns whereas most art-related studies rely on return estimates based on the time-dummies of hedonic pricing models. This choice is conceptually flawed since it is based on an ideal or average painting whose characteristics do not change overtime, and therefore, it does not capture total returns. We also claim that most indexes used in previous studies as proxy for the market are not able to capture the dynamics of the art market. These two observations call into question at least some of the findings of earlier researchers. Finally, we illustrate these points with several examples using actual auction prices for a group of surrealist artists. We also advance some proposals to overcome the above-mentioned shortcomings.

Keywords: Art markets, Hedonic pricing, CAPM, Returns, Indices

JEL Classification: C18, D44, G11, G12, Z10