Speculative Trading and Bubbles: Evidence from the Art Market

CentER Discussion Paper Series No. 2014-068

7th Miami Behavioral Finance Conference 2016

66 Pages Posted: 14 Nov 2014 Last revised: 19 May 2017

See all articles by Julien Penasse

Julien Penasse

University of Luxembourg

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Date Written: February 13, 2017

Abstract

The art market is subject to booms and busts in both prices and volume, which are difficult to reconcile with models where agents trade to consume. This paper shows that: (i) a high trading volume coincides with higher prices and more speculative trades, (ii) a high volume predicts negative returns, especially in the most volatile art schools, (iii) a substantial increase in transaction costs decreases art prices and can destroy the return-volume relation, and (iv) short-term transactions underperform and are riskier than long-term transactions. The evidence is consistent with a resale option model of speculative trading where the impossibility to sell short embeds a bubble component in prices. This paper suggests that speculative trading can generate significant price bubbles, even when trading costs are huge.

Keywords: Art Market; Bubbles; Return Predictability; Auction; Trading Volume

JEL Classification: G12, P34, Z11, D44

Suggested Citation

Penasse, Julien and Renneboog, Luc, Speculative Trading and Bubbles: Evidence from the Art Market (February 13, 2017). CentER Discussion Paper Series No. 2014-068; 7th Miami Behavioral Finance Conference 2016. Available at SSRN: https://ssrn.com/abstract=2523854 or http://dx.doi.org/10.2139/ssrn.2523854

Julien Penasse (Contact Author)

University of Luxembourg ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

Luc Renneboog

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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