Residual Variance and Asset Pricing in the Art Market

Journal of Cultural Economics, Forthcoming

39 Pages Posted: 15 Apr 2022

See all articles by Jianping Mei

Jianping Mei

Cheung Kong Graduate School of Business

Michael Moses

Art Market Consultancy

Yi Zhou

San Francisco State University

Date Written: March 13, 2022

Abstract

In this paper, we compute residual variance of art prices to examine asset pricing in contemporary art market. Our empirical work shows a few interesting results. First, we discover that the residual variance is significantly and positively related to the average price level achieved by an artist. Second, the residual variance has additional explanatory power in terms of how often the artist's works are cited and exhibited, even after we control for artist fixed (reputation) effects. Third, collectors tend to value more those artworks with higher residual variance. Artworks by those artists with high residual variance tend to outperform the market within and out of sample. One possible explanation of our results is that residual variance could be a proxy for creative risk taking by contemporary artists. The most creative artists dare to take more risks, which results in higher residual price volatility of their artworks.

Keywords: Asset Pricing, Behavioral Finance, and Cultural Economics

JEL Classification: G12,Z11

Suggested Citation

Mei, Jianping and Moses, Michael and Zhou, Yi, Residual Variance and Asset Pricing in the Art Market (March 13, 2022). Journal of Cultural Economics, Forthcoming , Available at SSRN: https://ssrn.com/abstract=4056300

Jianping Mei (Contact Author)

Cheung Kong Graduate School of Business ( email )

1017, Oriental Plaza 1
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Beijing
China
010-81588858 (Phone)
100738 (Fax)

Michael Moses

Art Market Consultancy ( email )

20 WEST 64TH STREET
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NEW YORK, NY 10023
United States

HOME PAGE: http://www.stern.nyu.edu/om/faculty/moses/

Yi Zhou

San Francisco State University ( email )

College of Business
1600 Holloway Avenue
San Francisco, CA 94132
United States
(415) 338-2661 (Phone)
(415) 338-0596 (Fax)

HOME PAGE: http://cob.sfsu.edu/directory/yi-zhou

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