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The True Value of Art
Prof. Dr. Roman Kräussl
Luxembourg School of Finance
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www.art-finance.com
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Remember September 2008
Real estate bubble
Severe stock market correction
Hedge funds and private equity highly correlated with
markets
ALL investments crashed!
“The art market shows spectacular resistance to the
economic trauma caused by Lehman’s collapse”, FT, 17
Sep 2008
Investing in art = safe haven?
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Art collecting in 2016
Art is booming: Collecting has become global activity;
record sales & record prices; art fairs, media coverage
Art is hip: ‘must-have’; very event-driven; dinner
conversations
Art markets turnover +400% over last 10y; 2015: $75 bn
HNWIs: 6-8% of wealth to passion investments
Popular press: returns of >100% p.a.
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$179,000,000 for Picasso’s Femme d’Alger in May
2015
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Art collecting increasingly seen as an investment
Investing in art? Consider financial returns!
No daily opening / closing prices
No dividends
Every artwork is unique
A “matter of taste”
There is no fundamental (objective) value for artworks
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“Fish without chips”
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For the Love of God
50,000,000 GBP
8,601 Diamonds
14,000,000 GBP
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Ink needed?
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My art price indices
z
j
m
i
yijn
i
yij
j
m
i
myi
n
i
nyi
y
m
X
n
X
PP
Index
1 1
1,
1
,
1
/11,
1
/1,
exp
)()(
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Hedonic variables
Segment, Style, Medium, Size, Condition
Theme
Provenance
Auction house
Living status
Reputation/artistic value
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A unique sample
Big data: 10,000,000+ auction records
1922 – 2016
Unbiased data set: full coverage, all auction houses,
“CRSP of art”
Indices for styles, segments, individual artists, individual
collections
Higher frequency (Q, M) allows for portfolio optimization,
wealth management, securitization, art market
derivatives, art funds
How does art perform as an investment?
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0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Art Top 500 S&P 500 Gold Real Estate
Art as an alternative asset class
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Optimal asset allocation
Art
Com-
modities
Corp.
Bonds Equity
Govt.
Bonds
Hedge
Funds
Private
Equity
Real
Estate
Observations 44 44 44 44 44 27 26 44
Artihm. mean 0.0262 0.0453 0.0432 0.0464 0.0428 0.0517 0.0520 0.0549
Geom. mean 0.0190 0.0394 0.0426 0.0421 0.0417 0.0506 0.0370 0.0468
Median 0.0066 0.0459 0.0452 0.0429 0.0344 0.0459 0.0530 0.0626
Maximum 0.3738 0.2673 0.1422 0.2480 0.1713 0.1385 0.5376 0.3626
Minimum -0.2600 -0.1870 -0.0312 -0.1952 -0.0392 -0.0500 -0.3516 -0.2411
Std. deviation 0.1264 0.1114 0.0356 0.0937 0.0478 0.0494 0.1786 0.1320
Sharpe ratio 0.0322 0.3536 1.1970 0.4495 0.8727 1.0236 0.2071 0.3544
Skewness 0.9243 -0.1679 0.2294 -0.4476 0.5169 -0.0530 0.1758 0.0556
Kurtosis 4.5032 2.3552 3.4893 3.2188 2.7444 2.4775 4.0125 2.8776
Jarque-Bera 10.4073 0.9691 0.8247 1.5567 2.0789 0.3198 1.2444 0.0501
Probability 0.0055 0.6160 0.6621 0.4592 0.3537 0.8522 0.5368 0.9753
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CAPM
Asset class
α β R-
squared F-statistic
Treynor
ratio Coef. (Std. Error) Coef. (Std. Error)
Art -0.003 (0.020) 0.248 (0.208) 0.033 1.42 0.016
Commodities 0.023 (0.017) -0.031 (0.184) 0.001 0.03 -0.781
Corp. Bonds 0.020 (0.006) *** 0.005 (0.059) 0.000 0.01 5.908
Equity 0.000 (0.000) 1.000 (0.000) *** 1.000 0.027
Govt. Bonds 0.019 (0.008) ** 0.057 (0.081) 0.012 0.50 0.468
Hedge Funds 0.029 (0.008) *** 0.243 (0.092) ** 0.217 6.92 ** 0.147
Private Equity 0.008 (0.021) 1.558 (0.221) *** 0.674 49.73 *** 0.014
Real Estate 0.009 (0.015) 0.983 (0.161) *** 0.470 37.21 *** 0.032
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Downside risk
Asset Class
Log Excess
Return β- (Std. Error) R-squared
Govt. Bonds 0.0272 -0.2745 (0.148) * 0.1411
Corp. Bonds 0.0277 -0.2230 (0.073) *** 0.3095
Commodities 0.0245 -0.1606 (0.358) 0.0095
Art 0.0041 -0.0924 (0.373) 0.0029
Hedge Funds 0.0357 0.0622 (0.161) 0.0113
Real estate 0.0319 0.5189 (0.286) * 0.1359
Equity 0.0268 1.0000 (0.000) *** 1.0000
Private Equity 0.0221 1.4985 (0.232) *** 0.7761
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Portfolio optimization
Panel B: Including art
Asset class
Asset Class Weights
Restriction A Restriction B Restriction C
∞%>= w >=0% 25% >= w >=0% 18.75% >= w >=0%
Art 0.0000 0.0325 0.0572
Commodities 0.0506 0.1252 0.1875
Corp. Bonds 0.4032 0.2500 0.1875
Equity 0.0000 0.0923 0.1875
Govt. Bonds 0.2043 0.2500 0.1875
Hedge Funds 0.3419 0.2500 0.1875
Private Equity 0.0000 0.0000 0.0000
Real Estate 0.0000 0.0000 0.0053
Reward-to-variability ratio 2.4419 2.1837 1.7651
Mean portfolio return 0.0920 0.0882 0.0856
Standard dev. of portfolio return 0.0293 0.0310 0.0369
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Review of Financial Studies (2016)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
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Sample selection bias (& correction)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
A B C No selection
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Art as an asset class? No.
Standard index return p.a. 10.1%; vola 17%; Sharpe
0.27; 0.3 corr MSCI World; mean-variance investor split
47-53 between art-equity
These returns are not what a passive art investor
actually earns, unless she is able to pick a portfolio of
“winners”
Corrected index return 6.3% p.a.; Sharpe only 0.11; zero
into art
(Please note: this is even before considering transaction
costs)
This is why most art funds fail(ed)
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Art investments suffer
High costs: transaction, storage, insurances
Art market is illiquid, opaque, only lightly regulated
High risks: fakes and forgeries, no valuation guidelines
Prices vary with condition, provenance, changing tastes
Why would any rational investor buy art?
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Emotional assets
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The 5 major non-financial motives
Aesthetic value
Passion for collecting
Status ($$$)
Prestige
Doing good
Art collecting offers values that no other investment offers
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Research
Art Top 500, Top 50 Photography, Gerhard Richter,
Younger than Jesus
Art market performance
Art market trends
Art investment strategies
Behavioral foundations
Optimal asset allocation / Wealth management
Is it an art market boom or a speculative bubble?
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Bubble detection
When will it burst?
-2.0000
-1.0000
0.0000
1.0000
2.0000
3.0000
4.0000
5.0000
6.0000
7.0000
8.0000
9.0000
10.0000
1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
99% Critical Value Impressionist and Modern Old Masters
Post-war and Contemporary 19th Century European
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The correction in contemporary
0
100
200
300
400
500
600
700
800
2000 2005 2010 2015
Art Top 50 Post-War and Contemporary Art Top 50 Born after 1945 Art Top 50 Born After 1970
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Buy What You Like.