The Collateral Value of Fine Art

31 Pages Posted: 28 Jan 2006  

Rex Thompson

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Clare McAndrew

Trinity College, Dublin

Abstract

In this paper, we examine the effect of implicit seller reserves on the estimation of value-at-risk based on historical asset sales data. We direct our examination toward how and whether fine art might prove an appropriate form of loan collateral for banks and other financial institutions. Using a data set of French Impressionist paintings brought to auction from 1985 to 2001, we control for the effect of works that are bought in-house to construct a distribution of potential sale values that corrects for sample selection bias. It turns out that the downside risk surrounding deviations of auction prices from expert presale estimates depends criticall on how buy-ins are incorporated. If downside risk is assessed solely on historical experience with successful auction sales, the data appear to support loan-to-value ratios between fifty and a hundred percent larger than loan-to-value ratios that countenance the existence of seller reserves. The auction process, however, appears quantifiable and can reveal the necessary risk information required for loan consideration.

Keywords: Downside risk, credit, collateral, art, buy-ins, VAR

JEL Classification: JEL, G12, G21, C16, Z10

Suggested Citation

Thompson, Rex W. and McAndrew, Clare, The Collateral Value of Fine Art. Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=878385

Rex W. Thompson (Contact Author)

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States
214-768-3052 (Phone)

Clare McAndrew

Trinity College, Dublin ( email )

2-3 College Green
Dublin, Leinster
Ireland

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