Speculation and hedging in art markets

Abstract

Alternative Investments are considered a possible option for investors willing to diversify their portfolios. They refer collectively to the many asset classes falling outside the traditional definition of stocks and bonds. Including categories like hedge funds, private equity, real estate, commodities and tangible collectible assets such as ne wines, stamps, automobiles, antique furniture, and for the purpose of this work: Art. The market for this type of collectible assets like art tend to be illiquid, and gains result only from the increase in the prices of these assets, but some investors are willing to take the trade-off for a higher return and/or the pleasure of owning such a piece. This works begins with a theoretical model between two group of Agents trading in an Art Market. The main findings stay that the price of an Art piece is determined by it's fundamental value plus the option to re-sell it in a future period which depends on the difference of beliefs about the value of the piece between the agents, so their is a risk-sharing component included in the valuation. Even though intuition makes as think while bigger the difference in opinion, bigger is the valuation of the asset. Our findings stay this true in most cases for a Risk-Aversed world, but there is a trade-off between the valuation from the possible resale option and the risk sharing component which also tends to increase with the increase of the beliefs disagreement between agents, so for a certain level of risk-aversion there is a certain interval which makes the increase of disagreement devaluate the art piece; contrary to the intuition introduced by Miller (1977). The second part of this work is a look for determinants of the art indexes calculated by Renneboog & Spaenjers (2013), W. N. Goetzmann et al. (2009) and Mei & Moses (2002). The methodology of this second part includes a Capital Asset Pricing Model adjusted by factors as determinant for art returns measures. The main findings of this second part are that uncertainty of new art-styles and crises tend to decrease art returns, while the search for luxury appetite, the need for hedge against possible in ations and the appearance of good sentiment in the market tends to increase art returns.