The True Value of Art

Prof. Dr. Roman Kräussl

Luxembourg School of Finance

www.art-finance.com

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?

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.

$179,000,000 for Picasso’s Femme d’Alger in May

2015

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

“Fish without chips”

For the Love of God

50,000,000 GBP

8,601 Diamonds

14,000,000 GBP

Ink needed?

My art price indices

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PP

Index

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exp

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Hedonic variables

Segment, Style, Medium, Size, Condition

Theme

Provenance

Auction house

Living status

Reputation/artistic value

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?

0

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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

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

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

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

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

Review of Financial Studies (2016)

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Sample selection bias (& correction)

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A B C No selection

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)

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?

Emotional assets

The 5 major non-financial motives

Aesthetic value

Passion for collecting

Status ($$$)

Prestige

Doing good

Art collecting offers values that no other investment offers

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?

Bubble detection

When will it burst?

-2.0000

-1.0000

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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

The correction in contemporary

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2000 2005 2010 2015

Art Top 50 Post-War and Contemporary Art Top 50 Born after 1945 Art Top 50 Born After 1970

Buy What You Like.