Portfolio Diversification Including Art as an Alternative Asset

Abstract

In the last decades, financial markets have experienced great uncertainty that has led investors to look for alternative assets to further diversify their portfolios. Art and collectibles fall under such category, and there is a lively debate among academics and practitioners regarding the role of art in financial markets and portfolio choices. For such reason, we investigate the financial characteristics of the art market, and build a portfolio diversified with art to asses whether it outperforms, in terms of risk and return, portfolios which do not include art. We show that art performs well compared with standard and other alternative investments with which art is low correlated. In addition, we find that art returns follow an untypical seasonal pattern, and that much of the volatility in the art market can be attributed to the seasonal component of the time series. Finally, the results of the portfolio optimization analysis indicate that art enters efficient portfolios, and when additional constraints are implemented into the classical mean-variance optimization model, to account for investors’ preferences for liquidity, portfolios which include art still perform well.

Keywords: Art investment, Alternative assets, Portfolio diversification, STL decomposi- tion, Mean-variance optimization

JEL Classification: C22, G11, Z11