A Risk-Assessment Framework for Art-Secured Lending

31 Pages Posted: 4 Jan 2020

See all articles by Ventura Charlin

Ventura Charlin

V. C. Consultants; EVENTUS ANALYTICS

Arturo Cifuentes

CLAPES--UC

Date Written: February 14, 2019

Abstract

We identify the three types of risks involved in an art-secured lending operation and present a framework to assess their combined effects via a Monte Carlo simulation. Also, we derive some useful closed-form expressions that are suitable when the collateral consists of only one painting. To help decision-makers and risk managers, we introduce a number of risk-related metrics that provide a detailed characterization of the lending operation risk profile. We conclude that with the customary LTV ratios currently prevalent in the art-based lending business (around 50%), the lender’s exposure is quite bounded. Moreover, the advantages of having a diversified collateral, from a risk perspective, are relevant. Finally, we find that the uncertainty related to the value of the painting is much more important than the uncertainty related to either the credit risk profile of the borrower, or, the artists’ returns during the period the loan remains outstanding.

Keywords: Art-Secured Lending; Art-Based Lending, Art-Risk Management, Financial Risk Management, Monte Carlo Simulation, Credit Risk, Market Risk

JEL Classification: C02, C6, G1, G11, G13, Z11

Suggested Citation

Charlin, Ventura and Cifuentes, Arturo, A Risk-Assessment Framework for Art-Secured Lending (February 14, 2019). Available at SSRN: https://ssrn.com/abstract=3334756 or http://dx.doi.org/10.2139/ssrn.3334756

Ventura Charlin (Contact Author)

V. C. Consultants ( email )

Avda. Los Leones 1300
Suite 1202
Santiago, RM 7510477
Chile
227897447 (Phone)

EVENTUS ANALYTICS ( email )

230 E 73rd Street
New York, NY New York 10021
United States

Arturo Cifuentes

CLAPES--UC ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

HOME PAGE: http://https://arturocifuentes.com/

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