Does it pay to invest in art? A selection-corrected returns perspective : [draft october 15, 2013]

  • This paper shows the importance of correcting for sample selection when investing in illiquid assets with endogenous trading. Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns. The selection-corrected average annual index return is 6.5 percent, down from 10 percent for traditional uncorrected repeat sales regressions, and Sharpe Ratios drop from 0.24 to 0.04. From a pure financial perspective, passive index investing in paintings is not a viable investment strategy once selection bias is accounted for. Our results have important implications for other illiquid asset classes that trade endogenously.

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Author:Arthur Korteweg, Roman KräusslORCiDGND, Patrick VerwijmerenORCiD
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2013,18
Series (Serial Number):CFS working paper series (2013, 18)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Year of Completion:2013
Year of first Publication:2013
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2013/12/16
Tag:art investing; portfolio allocation; selection bias
Issue:draft october 15, 2013
Page Number:49
First Draft: December 13, 2012  ; Current Draft: October 15, 2013
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht