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Art as a Financial Investment

R.AJ. CAMPBELL

R.A.J.

CAMPBELL

is ail assistant professor ot finance at Maastricht University and Tilburg Universiry in The Netherlands. rcampl)ell@'nnancp.unimaas.nl

he comparatively poor perfomiance of traditional asset classes in recent years has driven the search for greater returns via alternative asset classes. The idea of reaping higher risk-adjusted returns from diversification into assets that offer low and even negative correlation v^ith equities and bonds is extremely attractive. There has been significant growth in the traditional alternative investments such as real estate, commodity futures, private equity, and hedge fund investments. Additionally, a number of funds specializing in art have recently emerged. These appear to offer a highly beneficial diversification strategy with extremely low correlation with traditional asset classes. It is important for investors to understand the risk and return characteristics of this new alternative asset class. In this article, the author takes a close look at art as an alternative asset and examines how this new alternative asset is expected to perform. The author focuses on bear markets, when the benefits of diversification are most needed. The autlior looks at the risk and return characteristics of art using art market indices and analyzes the prospects for portfolio diversification in the art market by using a variety of data across art market sectors, including the Old Master, European Impressionist, Modern, and Contemporary art markets. Because ofthe low correlation of art with other asset classes, the author finds opportunities for portfolio diversification across art markets and across

asset classes. The results hold, even allowing for the high transaction costs that are encountered when trading art when spread over a longer time horizon. The possibility of investing in art has recently generated much interest among investors worldwide. Direct investment in art is, of course, not new. However, structured soiutions offered by art funds and a number ot boutique funds offer investors the possibility of investing in a diversified art portfolio which actively trades in art purely for financial gain. The most established is The Fine Art Fund, launched in 2003 in London, and since then ARTESTATE, Socit General Asset Management, and, more recently, the Art Trading Fund have all raised sufficient capital to provide investors with indirect investments in the art market. There is also a move towards more specialized funds that focus on one or two markets, such as Indian Art, Chinese art, or Contemporary artists. The majority of these funds actively trade their artworks, ARTESTATE being the current exception (it aims to hold a limited nuniber of artworks for the duration ofthe closed end fund). ARTESTATE also has a low entry level at 82500, whereas many other funds are focused more toward wealthy investors. These funds use a wide variety of trading strategies, similar to both private equity and hedge funds, trading on the inefficiencies currently present in the art market, which is typically characterized by low

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liquidity. Of course, in some cases, hedge fund managers access the art market indirectly. The interest in investing in art has received ati etaormous boost from the availability of art price data. Databases, indices, and market reports are now essential analytical tools with which art investors can assess financial performance. A number ot indices show average returns for artists and market sectors with data ranging from the 17th century to today. This article will focus on the use of available indices for various art markets to assess arts performance in a diversified portfolio. These indices provide a reliable estimate of the historical riskreturn profile, and serve as benchmarks that art funds aim to outperform. Obviously, the more speculative tniding strategies of some art fund managers wiU aim to outperform the market to a considerable extent, and the recent performance of the more established funds has generally shown this to be the case. This article will examine return patterns that an art investment portfolio would have provided, taking a more conservative .ipproLich to examniing the financial gains that artworks have generated historically. This study also includes transaction costs, which can be considerable in the art market, although, in practice, art finids typically are able to negotiate on these costs. In the following sections, the author reviews the current literature and discusses current data on art indices and the associated methodologies. The author explores the risk and return characteristics of ftne art tnarkets and analyzes art as an alternative asset class in an international diversified portfolio. The author accounts for the high transaction costs encountered when auctioning fine artworks as well as the implications of smoothed returns, which occur tor assets that are appraisal based. Because of the moderate returns found for art investments in tlie last 30 years and the low correlation with other asset classes tliat art appears to exhibit, the author finds a case for holding a small percentage of the investment portfolio in art. Currently, it is inconceivable to hold an index tracking fund; however, there are a number of alternative ways to hold a diversified art portfolio as part of an overall wealth management strategy. ART INDICES Only a limited number of studies have attempted to construct art price indices. The first significant study was by Stein |1977], who looked at average prices. More

prominent studies using repeat-sales regression followed: Bauml [1986]; C.oetzmann |1993], and Pesando 119931. Stein [1977] pointed out the selection bias derived from looking only at repeat sales on auction house data; however, average prices also suffer from serious biases in a highly heterogeneous market. Repeat-sales regressions require artworks to be offered for sale at auction more than once to be included as a repeat sale. The annual art return index provided by Goetzniann is fairly extensive dating troni 1715 to 1986, with art market returns since 1850 providing a higher return than stocks or bonds, albeit with a much higher standard deviation. Pesaiido provided a semianiuKil index for the shorter 1977-1992 period, which includes the collapse in prices at the end of the ]9K0s, not covered in the Goetzmann index, and gives returns for art well below both the equit\' and bond markets, while the variance ot these returns is similar to equity markets. The most recent index is the Mei atid Moses [2(H)2| index using U.S. data. Anderson [ 1974|, and later Beulens and Ginsburgh [1992] used hedonic pricing models that also analyze the specific characteristics of the artworks, such as size, artist, and art style. More recently, there has been a move to incorporate hedonic pricing within a repeat sales framework. Zanola [2007] provided indices that more accurately establish the price determinants in art valuation. Data and Methodology The Mei Moses and Art Market Research art indices are the two most widely quoted indicators of art market performance. Both rely on data from sales at the main auction houses. However, auction results alone provide an incomplete picture of the market performance because they represent only a subset of the whole market. The dealer market is largely ignored because of an absence of obtainable data. There is some disagreement as to what percentage of the market is composed of dealers. Figures troni two recent studies range from a 50-50 split between auction houses and dealers to a 7030 split in favor of dealers. In any event, it cannot be denied that dealers have a significant, albeit un quantifiable, impact upon the art market. The absence of dealers' transactions from the art indices may have a bearing on the rate of return reflected by the indices. This is because dealers may buy at lower prices but sell at prices with higher transaction costs, thereby reducing the art investors' rate of return,' ft is likely that art funds, which act more like private dealers

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than auction houses, adopt a similar strategy by using their insider knowledge and expertise to exploit inefficiencies in the market. This is likely to produce art tnarket returns much larger than the benchmarks used here. Four primary methodologies are used to construct art price indices: geometric means, average prices, repeatsales regressiotis (RSR), and hedoiiic regressions. Chanel, Gerard-Varet, and Ginsburgh's [ 1996] study indicated that over long periods, the respective methodologies are closely correlated. Issues regarding the various index pricing methodologies were documented by Ginsburgh, Mei, and Moses [2006], which specifically compared hedonic to repeat sales regression. Ashenfelter and Graddy [2003] provided a survey of average returns estimated from art price data, currently in the academic literature. Exhibit 1 gives the estimated art market performance found by these and a tew additional studies. For the purpose of this comparison, this article will focus on the data from Art Market Research because it provides a wider and more frequent source of information. The author also provides some comparisons with the Mei Moses All Art index. These indices show that historically, average real returns for art are moderate. Returns are above inflation and tend to be greater than government bonds but less than equities. There has been a general upward trend in art prices in the marketThe survey of art pricing methodologies in Exhibit 1 tends to indicate that the repeat sales methodology provides slightly higher estimates ot average returns than the other methodologies for similar time periods. For example, Anderson [1974] provided RSR and hedonic price indices tbr the periods 1780-1970 and 1780-1960 and Ghanel, Gerard-Varet, and Ginsburgh [I996| for the 1855-1969 period. It is of interest to observe the long-run trend in tlie market and note that there have been periods In whicli art returns have been substantially higher than average. To evaluate the various index methodologies, the author uses data from both Art Market Research (AMR) and Mei Moses (MM) All Art Index. AMR data are available monthly but only go back to 1976. The author includes all available data for each sector. It is important to include the entire distribution in the indices because this takes into account the extreme price movements in the market that are vital in correlation estimation and the analysis of diversification benefits. AMR data uses average returns on a 12-month moving average. Tlie MM series for the All Art Index dates back to 1875, measured on an annual basis, and to 1965, on a 66

semiannual basis. The MM All Art Index is computed using repeat sales initially sold at auction by Sotheby's and Christie's. Exhibit 2 provides summary statistics for the two price index methodologies. To compare the two series, semiannual data from 1976 to 2002 are used.- Using semiannual data rather than monthly increases the series' annual volatility, and the shorter time period results in a slightly lower average annual return. For all indices, calculate the return ofthe market, /, by continuously compounding returns. This is more appropriate than measuring cumulative returns. The return is the natural log return ot the price index at time, /, such tliat A/J.j denotes the rate of change ofp. ^ i

AP =]n\

X 1U

P.

(1)

Exhibit 2 shows that the average return on the MM data series for the 27-year period was much higher than when using the A M R data. Using repeat sales, the average return on an annual basis is over 10%, whereas the A M R general art index is just over 5.25% (8% for U.S. artists and 5% for artists in the U.K.).-^ Stein | I 9 7 7 | , Goetzmann [1993], and Ginsburgh [2006] acknowledged the selection bias that occurs from focusing on repeat sales. To be included in the calculation, repeat sales regression requires artworks to be otfered tor sale at auctions more than once. It is thought that artworks that fall drastically in value tend not to he resold at auctions."" Computing the correlation statistics for the two different index methodologies reveals that the correlation ofthe A M R index with the M M Index is only 0.2 (see Panel B of Exhibit 2). This is because of smoothing in the A M R index. Taking a two-period moving average for the return series increases the correlation dramatically. This is especially true for the All Art Index and the U.S. 100 indices, which have a correlation coefficient of 0.86. The larger number of observations used for the moving averages provides higher correlation coefficients (see Panel C in Exhibit 2). These results indicate that the two methodologies result in indices that are good proxies of art market prices of auction sales data. The collection of information from databases is, however, problematic for a number of reasons. Ashetifelter

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EXHIBIT 1 Estimated Fine Art Market Performance, 17th to 21st century (as reported by variotts academic papers, by period of study)
Aatbor Bauml 119861 ['rey and Pommerehne 119891 Sample Paintings in General Paintings in General Period 1652-1961 1635-1949 1653-1987 1950-1987 Buelens and Ginsburgh 119921 Goetzmann |I993| Paintings in General Paintings in General Paintings in General 1700-1961 1780-1970 1716-1986 1S50-I986 1900-1986 Anderson |I974| Chanel, Gerard-Varet, and Ginsburgh |I996| Paintings in General 1780-1960 1780-1970 Paintings in General American. Impressionist, and Old Masters 1855-1969 1855-1969 Meiand Moses |2OO2| 1875-1999 1900-1986 1900-1999 1950-1999 1977-1991 Coetzmann |1996| Fase II9961 Paintings in General 19th Century 1907-1977 1946-1966 1972-1992 Stein |t977| Barre. Oocclo, and Ginsburgh |I996| Czujack |I997| Deutschman 1199I| Angnello and Pierce [19961 Campbell |2OOS1 Pesando |1Q93| E'csando and Sbum 119961 Frey and Serna [1990| Candela and Scorcu [1997] Paintings in General Great Imptessionist Other Impressionist Picasso Paintings Old Masters 19th CenUiry US Paintings in General US Paintings Modem Prints Pieasso Prints Old Masters Modem and Contemporary Paintings 1946-1968 1962-199] 1962-1991 1966-1994 1971-1991 1971-1992 1976-2004 1976-2004 1977-1992 1977-1992 1981-1988 1983-1994 Average prices Average prices RSR RSR Hedonic 12.00% 10.59% 3.89% Geometric Mean Hedonic Hedonic Hedonic 12.30% 9.30% 5.73% 7.94% Method RSR RSR RSR RSR Hedonic RSR RSR RSR RSR Hedonic RSR Hedonic RSR RSR RSR RSR RSR RSR RSR 11.00% 10.60% 10.47% 12.0% 8.00% 5.00% 1.00% 8.30% 6.04% 3.25% 1.44% 3,66% 1.51% 2.10% 3.20% 0.21% 8.27% 8.73% 19.94% 23.38% * 3.70% 3.20% 6.20% 17.50% 3.30% 3.70% Nominal Return Real Return 0.60% 1.40% 1.50% 1.70% 0.91% 3.00% 2.00% 3.80% 13.3% 2.60% 3.00% 4.90% 5.00% 4.90% 5.20% 5.20% 8.20% 7.80% 5.00% 7.50% 1.10% 4.28% 3.72% 3.55% 2.13% 2.11% * *5.65% 6.50% 5.19% * 5.00% Standard deviation

teiitrns estimaied addiiionally hy A.f:heiifelit'r and Gniddy.

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EXHIBIT

Comparison of AMR Average Price data and MM Repeat Sales Indices, 1976-2002 Panel A. Semiannual log return data 1976/01-2002/12 Average Prices ART 100
Annual Average Return Annual Average St Deviation Average Standard Deviation Skew ness Kurtosis 5.27% 17.11% 0.026 0.121 -0.837 1,694

Repeat Sales UK 100


5.12% 11.10% 0.026 0.078 -0.097 -1.083

US 100
8.26% 15.86% 0.041 0.112 -0.817 1.029

All Art Index


10.07% 21.88% 0.050 0.155 -0.277 -0.395

Panel B. Correlation Matrix Semiannual log return data 1976/01-2002/12 Average Prices Art 100 US 100 UK 100 AI! Art Index ART 100 1,000 0.822 0.651 0.210 US 100 1.000 0.565 0.221 UK 100 Repeat Sales All Art Index

1.000 0.250

1.000

Panel C. Correlation Matrix Semiannual log returns2 period moving averages 1976/01-2002/12 Average Prices Art 100 US 100 UK 100 All Art Index ART 100 1.000 0.871 0.716 0.857 US 100 1.000 0,644 0,714 UK 100

Repeat Sales AU Art Index

1,000 0.342

1,000

and Graddy's [203] study contended that an empirical discrepancy in one year can materially alter tbe overall rate of return by up to 5%. Evidence o this phenomenon can be found when the Mei & Moses All Art Index is compared with the General Art Index of Art Market Research for the 19762002 period. A difference in their estimations of the return after the art market bubble burst in 1991 results in a significant difference between the average return figures thereafter. This can be observed in Exhibit 3, where both indices are plotted together. The repeat sales index does not capture as significant a downturn as the AMR data does. This difference also indicates the importance ofliquidity during downturns in the art market. The number of art sales is likely to be greatly reduced in downturns.

with the market becoming more illiquid. The art investor faces a greater degree of liquidity risk tban investors in other hnancial assets. When artworks tail to reach their reserve prices and are sold, the price indices are affected. Fewer transactions result in larger estimation errors. At present, little information is available on market liquidity over the empirical time series. This problem is especially significant for repeat-sales regression estimations, which are constructed with fewer observations. It is likely that the price estimation error that occurred after the art market crash in the early 1990s was because of this issue with repeat-sales estimation. Mei and Moses suggested that art does significantly better during wartime, using the example of four U.S. wars (Forbes |2()()11). During these periods, art appears to outperform stocks. This finding may also

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EXHIBIT 3 Comparison of Art Price Indices, 1976-2002


Repeat sales All Art Index versus the average price indices from Art Market Research tor the general art market (Art HKl), a basket ofU.S. artists (US 100). and a basket of British ardsts (UK 100). Repeat Sales vs. Average Price Indices
Semi - annual data 18000 16000
14000

-ART 100 - US 100 All An Index

- - - UK 100

(N N

fl 4

S S 8
average price data for the V.S., U.K., All .4rt Index, and MM Repeat Sales hidiics, 1976-2002, using semiatniuat data.

be because ofthe lack of liquidity during these periods and is a highly interestitig point that requires further investigation. Evidendy, fundamental problems exist with art databases and indices. However, both databases and indices are becoming more sophisticated and accurate at providing objective information. Comfort can be taken from the fact that tbe Standard ik Poor's index was recently overhauled. If well-established, traditional investment indices are still tweaking their assumptions, art indices should be allowed to refme their models over time. Although the information provided by the databases and indices is not complete, it is the best market information that is currently available. Tbe information provides us witb a somewhat robust indication ofthe general trends in tbe market. Moreover market anotnalies and inef^iciencies may lead to much higher realized returns. Investment skill hes in interpreting the available information, assessing wbether the risk-return ratio is acceptable and deciding whether the investment is appropriate to an existing portfolio. Taste adds an additional unquantifiable

element of risk to art investment even after market analysis has been undertaken. Art as a direct investment presents a risky investment opportunity, although purchasing according to personal taste results in an aesthetic benefit that can potentially outweigh any fmancial benefit or loss incurred. When considering art as an indirect investn^ent, where the non-pecuniary benefits are not obtained, an investor would be advised to opt for an alternative investment vehicle (AIV) or art mutual fund (AMF), in wbich risk diversification through tbe securitization of artworks is more likely to result in greater fmancial returns. Fine Art Market Performance To analyze tbe performance of a variety of art markets, tliis article focuses on the indices produced by AMR. These indices also allow for a breakdown ofthe fine art market into various sectors. For the various schools, movements, and periods, the average prices of sales by individual artists are combined to form an equally

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weighted portfolio. This analysis uses the General art index as well as the following four sectors of the art market: Old Masters, European Impressionists, Modern, and Contemporary. The General art index contains a mixed basket of over 100 well-known artists ranging from Basquiat to Canaletto. The index covers a variety of artists from different sectors and countries, constituting a diversified index of art. The index comprises art sales data from over 109,000 auction sales. The Old Masters index consists of European artists until the 18th century There are over 25,000 sales included in the index with artists from Brueghel [1568-1625] to Constable [1776-1837]. The index for European Impressionist art contains a smaller sample of 25 artists, tor example, Manet [1832-1883] and Matisse [1869-1954]. The period includes European Impressionist artists in the late 19th century and also some Post-Impressionists. The number of sales included in the index is lower than for other sectors, with just over 22,000 prices included. Modern art contains a higher number of artists and sales prices, with over 63,000 transactions included. EXHIBIT 4 Performance of Various Fine Art Markets, 1985-2006
ART SECTORS JAIN 1985-FEB2006
10000

These range from Kandinsky [18661944] to Bacon 11 9091992], There may be some disagreement among art historians about the exact definitions ofthe classification ot Modern art. The final sector is Contemporary art, for which there are over 21,000 sales included in the data. The index is newer with d;ita starting in 1985. Artists covered include Freud [1922-] and Hirst [1965-]. The choice of artists, which is shown in the appendix, is a highly subjective but representative choice. The indices, therefore, provide a general indication of art sector price movements. Exhibit 4 shows that prices over the past 20 years for the various sectors have at times diverged quite substantially, particularly during the period ofthe 1988-1991 bubble, which affected Impressionist art more than other sectors. Including contemporary art and rebasing the indices to January 1985. when all series are complete, it can be seen that the contemporary art sector has outpertormed all others over the past 20 years. Impressionists were the lowest performers, v^nth their greatest returns having been made iti the late 1970s.

GENERAL ART

OLD MASTERS

EUROPEAN IMPRESSIONSTS

MODERN 100

CONTEMPORARY 10

Note: AMR awriige price data for the irt market iectors usin^ iiioiithly i/uM from JiWimry 1976 to Fclmiiiry 2006.

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RISK AND RETURN Using data from January 1980 until February 2006 gives 25 years of monthly return data for a variety of sectors. Over this period, the general art index has made an average annual return of 6.5%. More specifically. Old Masters have generated 5.5%; European Impressionists, 6.3%; and Modern, 7.5%. Contemporary (data starts in 1985, so using the slightly shorter 20-year period) have offered the highest returns at 9% on an annual basis. Using a representative, liypothetica! fund that holds a composition ot 3(t% Old Masters, 15% European Impressionists, 15% Modern, and 40% Contemporary, the average return using data frotn the various sectors would have been 7.05%>. Again, this is for the 20-year period, because data on Contemporary art starts in 1985. Descriptive statistics are shown in Exhibit 5. The European Impressionists have been the most volatile market with an annual average standard deviation ofthe

series of more than 15%. Old Masters have been the least volatile with only a 7% average annual standard deviation. A closer look at the risk and return characteristics of the sectors, focusing specifically on the 25-year period liom 1980 to 2006 (this period is chosen because other asset class data is also only available from 1980) shows that the fine art indices are themselves not highly correlated. This gives an indication ot the potential benetits trom holding;! diversified art portfolio across artists and across various art sectors. The highest correlation over the period is between the general art index and all other sectors, most hkely because each of the individual sectors feeds into the general art index. The correlation coefficients range betweeti (1.27 and 0.53 for the four individual art sectors. Modern art and the general art index have a correlation of 0.76. An examination ofthe return-risk ratio ofthe various sectors shows that Modern and Contemporary art offer the highest return for a tuiit of risk, where risk is

EXHIBIT

A. Descriptive StLilislics lor Fine An Mitrkcls. I'lSO 2 FUND COMPOSITION* AVERAGE ANNUAL RETURN AVERAGE ANNUAL ST. DEV AVERAGE MONTHLY RET AVERAGE MONTHLY ST DEV SKEWNESS KURTOSIS RETURN/RISK GENERAL ART OLD MASTERS EUR IMPRESSION CONTEMPORAKY*

MODERN

7.05% 6.92% 0.006 0.020 0.544 2.099 1.02

6.56% 8.08% 0.005 0.023 -0.518 3.583 0.81

5.52% 7.09% 0.005 0.020 0.149 0.469 0.78

6.30% 13.12% 0.005 0.038 -0.112 3.510 0.48

7.55% 3K% 0.006 0.021 -0.146 3.113 1.02

9.00% 9.90% 0.007 0.029 1.048 3.562 0.91

B. Correlation Statistics for Fine Art Markets 198O-2006 GENERAL ART 1.000 0.430 0.740 0.761 0.534 OLD MASTERS 1.000 0.338 0.299 0.279 EUROPEAN IMPRESSIONISTS MODERN 100 CONTEMPORARV 100

GENERAL ART OLD MASTERS EUROPEAN IMPRESSIONISTS MODERN 100 CONTEMPORARY 100

1.000 0.611 0.346

1.000 0.530

1.000

Note: AXiR average price dala for the an market sectors usinj monthly data from iniary 1980 to Ffhni.iry 2006. The diiiii for ilic (Joiiivinponiry ,nt iiHii thv Fund composiiioii iisinj; the Contemporary an market do not sitirt until fiuiiiary 1985.

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measured by the standard deviation of returns. Per unit of risk, the fund composition also offers an attractive return of 1.02. Although the average return is slightly less than tor the Modern and Contemporary markets, the risk is alleviated through a well-diversihed portfolio in which returns per unit of risk are as high as for Modern art. The risk-return trade-off can also be depicted graphically, as shown in Exhibit 6. Generally, there is a positive trade-off between risk and return. The relationship of a higher expected return required for an investor to face greater risk is an underpinning of modern fniance theory. The higher the return and the lower the risk, the more desirable the index from a ftnancial point of view. In this case, the most attractive position from a ftnancial point of view is the top left-hand corner ofthe graph. This is illustrated tor both the Modern and Fund composition markets. Asset Class Framework The financial markets analyzed represent the major asset classes. The author uses the Morgan Stanley Capital
EXHIBIT 6

Indices^ for U.S. equity (MSCI US), U.K. equity (MSCI UK), and world equity (MSCI World), Lehman Brothers Aggregate Corporate Bond Index, and North American Real Estate Investment Trust Index (NAREIT). For the hedge fund data series, the author uses the Credit Suisse/Tremont Hedge Fund data series dating from 1994. S&P GSCI commodity futures data is from Goldman Sachs. The author uses the U.S. and U.K. ID-year Government Bond Indices, and U.K. Govemtneiit Treasury Bills, which have been available on a monthly basis only from 1980. Data are collected frotii Datastream, Global Financial Data, NAREIT, and Credit Suisse/Tremont. Descriptive statistics are given for a variety of time horizons for all asset classes in Exhibit 7. Exhibit 8 plots the general risk and return trade-offs for the variety of asset classes. Because of the smoothed nature ofthe art market return series, the exhibit also includes information for the desmoothed art index, which accounts for the moving average in the series. The risk is substantially higher for the same level of return and hence should be more reflective of the true volatility in the

Risk-Return Trade-Off for Fine Art Markets, 1980-2006

Jan 1980-Feb2006
10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00%
0.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%

Contemporary* Fund Composition* Old Masters Modern General Art European

Average Annual Standard Deviation


*diitiifrom 1985. Note: AMR average price data for the art market sectors usii{ monthly data from January i 980 to February 2006. The data for the Contemporary art market atid the Fund amipoiitiou using the Cofitcmporar)' art ntarkei do not sMri until January 1985.

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E X H I B rT 7 Descriptive Statistics for Fine Art and Financial Markets


25 Years World Equity 10.88% 13.93% 0.009 0.040 -1.175 3.866 US Equity 12.39% 15.16% 0.010 0.044 -0.847 3.404 UK Equity 13.27% 16.63% O.Oll 0.048 -1.270 5.755 US Corporate Bonds 14.91% 22.72% 0.012 0.066 3.174 50.560 Commod Futures 8.42% 17.44% 0.007 0.050 0.071 1.252 USIOY Govt Bonds 8.36% 8.62% 0.007 0.025 0.138 1.274 UKIOY Govt Bonds 11.00% 8.57% 0.009 0.025 -0.211 1.413

A. 1980-2006 Annual Av Return Annual St Dev Average StDev Skew

NAREIT Art 11.98% 12.88% 0.010 0.037 -0.766 2.918 6.56% 8.08% 0.005 0.023 -0.518 3.583

Kurt 15 Yean
B.1990-2006 Annual Av Return Annual St Dev Average StDev Skew

World Equit>' 6.78% 14.00% 0.006 0.040 -0.827 1.217

US Equity 10.28% 14.35% 0.009 0.041 -0.589 0.935

UK Equity 8.60% 14.27% 0.007 0.041 -0.491 0.623

US Corporate Commod Bonds Futures 8.33% 4.53% 0.007 0.013 -0.376 0.590 7.36% 19.38% 0.006 0.056 0.247 0.910

USIOY Govt Bonds 6.52% 6.99% 0.005 0.020 -0.444 0.829

UKIOY Govt Bonds 9.02% 6.75% 0.008 0.019 -0.076 0.631

Hedge NAREH' Funds* Art 12.10% 12.89% 0.0 H) 0.037 -0.669 2.123 10.31% -1.26% 7.79% 7.54% 0.009 -0.001 0.022 0.022 -0.035 -1.459 2.367 4.751

Kurt
S Years

C.2000-2006 Annual Av Return Annual St Dev Average StDev Skew Kurt

World Equit)' 0.06% 14.23% 0.000 0.04! -0.596 3.SS5

US Equity -1.28% 15.29% -0.001 0.044 -0.274 3,381

UK Equity 0.93% 14.14% 0.001 0.041 -0.896 5.480

US Corporate Commod Bonds Futures 7.18% 4.20% 0.006 0.012 -0.967 42.897 13.11% 22.55% 0.011 0.065 -0.188 I.I90

USIOY Govt Bonds 6.19% 7.64% 0.005 0.022 -0.773 1.274

UKIOY Govt Bonds 6.35% 4.62% 0-005 0.013 -0.338 1.413

NAREIT 19.10% 14.06% 0.016 0.041 -1.488 2.823

Hedge Funds Art 7.53% 5.09% 0.006 0.015 0.204 2.367 3.56% 5.17% 0.0030 0.0149 1.3833 4,9021

Moifs: Bqiiiiy ifiilkes arc from Morj^aii Shuihy Capital iiJiirs for U.S. equily (MSCI US), U.K. i'i]tiity (MSCI UK), ami world equity (MSCI IVorld). U-liinmi BrotluTs Ai^it\i>atc Corporate Bond tndcx (amilabk only for the U.S.) nnd Nortii American Real Esiaic liweslmcnl Tntsl Index (NARHil'). For the Imi^^efund data series, tin- Credit Suisse/Tretmmt Hedge Fund data series datingom 994 is used. Vie U.S. and U.K. lO-year Goivrntnent Bond indices, and U.K. Covernment Treasury Bills have only heen auailable on a monthly basis from 1980. S&P CSCI ammodity iturc data is amilahle from Coldnhiii Sachs. Other data were collected frotn Datastream. Global Financial Data. NARBIT, and Credit Suisse/Tremont. All .Art Index from Art Market R.csamh. All other data is monthly from fanuary 980 to February 2006. * Hedge Funds are the Tremont Hed' Fund Data.

market. This desmoothing process is common in the finance literature for real estate and hedge funds. This desmoothed data is also used in the analysis on optimal portfolio allocation. Exhibit 9 gives correlation statistics for the 25-year horizon. Art has a low correlation with other asset classes: the highest being commodity futures with a monthly 0.09 correlation and the most negatively correlated being NAREIT, whose returns arc correlated at -0.08. The correlation with domestic real estate and art tends to be higher.

Correlations with other asset classes remain low even after accounting for various time horizons, as shown in Exhibit 10. During the recent bear market for equities, when commodity futures prices, government bond indices, and real estate markets all rose, the correlation between art and other asset classes has been positive, albeit quite low (see Exhibit 11). Deriving the return per unit of risk for the various asset classes shows that over the past 20 years, hedge funds have ofiered the most attractive returns; U.K. government

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73

EXHIBIT 8 Risk-Return Trade-Off for Finaticial Asset Classes, 1980-2006 Jan 1980-Feb2006
16 .00% 14 .00%
rage>Annual R :urn l^^^l^ UK Govt Bonds Hedge Funds' Govt Bonds 8 .00% Commodity Futures 'General Art Desmoothed Art World Equity Corporate Bonds, US Epuity-UK Equity

12 .00%
10 .00%

0)

6 .00% 4 .00% 2 .00%


0.00% 0.00%

5.00%

10.00%

15,00%

20.00%

25.00%

Average Annual Standard Deviation


Noie: See Exhibit 1 notes.

bonds also showed a good return per unit of risk. NAREIT, art, and equity have also offered attractive investment opportunities. The level to which these assets can reduce risk in an asset portfolio depends crucially o the extent to which the returns are correlated with each other. The lower the correlation, the higher the diversification benefits, and the greater the ability ofthe portfolio to maintain returns while reducing risk. This results in more moderate returns being generated with a lower standard deviation around the expected mean. For the lowest 10% of returns on the U.K. equity market for the last 25-year period, the average return on other financial assets varied between 6% for world equity and 1.4% tor U.S. corporate bonds. U.K. government bonds also provided good protection with returns ciose to the average 9% over the same period {see Panei A of Exhibit 7). Art proxides significantly greater monthlyrcturnsduring these months than the other asset classes. This is, of course, affected by the smoothing process inherent in the data. Portfolio Diversification Determining optimal portfolio allocations requires an assumption about the expected return distribution of asset classes. The best prediction ofthe future is helped by examining the historical distribution of returns as an

estimate ot future expected returns. This, of course, depends on the time horizon chosen in the past. This article provides a number of descriptive statistics as well as correlation coefficients for the time horizons of 25 years, 15 years, and 5 years. Data on U.K. government bonds are only available on a monthly basis since 198(1. Because government bonds are a crucial element of any welldiversified portfolio, the portfolio is optimized by using data from the past 25 years. Importantly, investing in art has large transaction costs, sometimes as much as 30% ofthe sale price. This expense can be minimized by using a long time horizon, such as 25 years. In Exhibit 12. the risk-return trade-ofF between the various asset classes is shown along with the optimal portfolio when art is included. Also shown is the capital market line where the risk-free rate (where the risk is assumed to be zero) intercepts with the y-axis and the optimal portfoho of assets. Tbe investor can obtain any position along the capital market line by holding a proportion of his wealth in cash, with an expected return equal to the risk-free rate and the optimal portfolio. The optimal portfolio is derived from the perspective of a U.K. investor who has the possibility of investing in the following indices; World, U.S., and U.K. equity, U.S. corporate bonds, Cotnmodity Futures Inciex,

74

A R T AS A FINANCIAL INVESTMUNT

SPRINC; 2()()8

-- o o

-^ d d d d
3 r>- M (p s

S r- o i*) S ^ 9 d d d 9

o i Irt M [M P - r>

i qsss ^
d 9 9 9 9 9

S 2 g i g
d o J ^

o o
00

NAREIT, lO-year U.K. government bonds. Art. and hedge funds. The portfolio is first optimized excluding an investment in art by using the risk-^return profile from the past 25 years; the results are presented in Panel A of Exhibit 13. When including General Art in the portfolio, the low correlation with the other asset classes results in a high allocation to art in the portfolio (more than 20%). This is derived using the General Art index rather than the fund composition, which would be an even higher percentage allocation in the optimal portfolio. Therefore, the more conservative return from the General art index does not overemphasize the art allocation. An important feature ofthe data methodology behind the indices is the moving average, which results in a positively autocorrelated series. It is important in the analysis on risk and return and on portfolio diversification tbat the true market risk and return levels be calculated. In the next section, the desmoothed data results in a more volatile return series that is more in line with the true art market volatility. Henceforth, this examination will take transaction costs into account, which has the effect of reducing tbe returns generated on the series, and will look at how these two eTects of greater risk and lower return affect the optimal portfolio allocation. Finally, the analysis will include hedge funds in tbe optimal portfolio allocation, Desmoothing Returns

S
c .S c
C
o

qqqrj'^qSqP ^ d d d d d d d d 9

C ^ N

03 C f N

C D

Irt

q d

R q 9 d o d d d d d d d d d d d

oo
C Q

Z < t Z
y^

lu i S a. O aouiijui

At first glance, the art market does not appear to bave been very volatile. However tbe lower volatility in the art market is likely the result of appraisal-induced biases, which occur during tbe indexation of tbe art data. Tbe smoothing of the returns is a result is this as well. Tbis has the effect ot generating volatilities that are substantially lower tban the true volatility ofthe market. Because tbe data tor the art indices are generally appraisal based, the analysis needs to account for this. Although they are a highly valuable source of information regarding behavior ofthe art market, there is of course a difference hetween the appraisal-based returns and the true market returns. It is tbe true market returns tliat actually represent the economic opportunity cost to investors, and the statistical properties of which are directly comparable to alternative asset classes. The illiquid nature ofthe art market, with mfrequent valuations, and averaged price quotes, leads to a smoothing in the returns. It is therefore imperative that the series he "desmootbed" to eliminate,

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EXHIBIT 10 Risk-Return and Correlation Statistics for Fine Art and Financial Markets: 5 Years, 15 Years, 25 Years US
GENERAL ART MSCI MSCI WRLD USA MSCI UK CORP BOND GSCI US 10 YEAR GOVT. BOND UK 10 YEAR GOVT. BOND

REIT

HEDGE GEN FUND ART

1980-2006 1990-2006 2000-2006 RETURN/RISK


Note: See Exhibit 7 notes.

4.7% -3.2% 2.0% -6.1% 0.78 -4.2% -5.0% 0.82

3-2% -0-7% -2.9% 0.8

-1.3% 9.1% -3.0% -11 .8% 7.1% -5.4% 3.8% 0.70

-6.3% -7.5% -5.3% -6-7% 11.5% 1.28 -7.0% -5 .3% 4.4% -8 .9% 0.93 1.32

100.0% 100.0% 100.0% 0.81

-2 .5% 10.1% 0 .66 0.48

EXHIBIT 11 Fine Art Market Performance during U.K. Equity Bear Markets, 1980-2006
Asset Class Returns during Equity Down Markets Based on Monthly Data: Jan 1980-Feb 2006

as far as possible, any underlying autocorrelation, which tends to be characteristic of these smoothed series of appraised returns. The most widely used approaches are those of Geltner [1993|, trom the real-estate finance literature and now also common in the hedge tund literature (Brooks and Kat |2001], and Kat and Lu [20021). Geltner adjusts the return series to eliminate the first-order autocorrelation. Assuming that the observed (smoothed) return on the art index, r^, is a weighted average ot the true under-

lying return at time i, r^, and the observed (smoothed) return at time - 1, f",_p' r] = ( l (2)

Simply rearranging enables the determination ofthe actual return, which, if assumed to be an AR(1) process, acts to eliminate the first-order autocorrelation.

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ART AS A FINANCIAL INVESTMENT

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E X H I B I T 12 Risk-Return Trade-Off: Optimal Portfolio Allocation, 1980-2006

Jan 1980-Feb2006
Corporate Bonds ^UK Equity UK Govn Bonds * * Hedge Funds Commodity Futures Ganeral Art NAREIT * US Equity World Equity

0%

5%

10%

15%

20%

25%

Average Annual Standard Deviation Note: See Exliihit 7 notes.

r. r = 1- a

(3)

If che first-order autocorrelation ot the sinoothfd series is positive, then the standard deviation ofthe actual return series will be greater. However, if the first-order .uitocorrelation ofthe smoothed series is negative, then tlic standard deviation ofthe actual series will be lower. If the autocorrelation structure is more comphcated, then the more rigorous process developed by Okunev and White [2()(l3| can be adopted to remove higher levels of autocorrelation in the smoothed series:
+ "2 -

(4)

where the constant, a, to desmooth the series, is a flinctioii of higher orders of autocorrelation.'' This approach is directly apphcable for art indices, which also exhibit exceptionally high autocorrelations in reported returns. There is indeed evidence of smoothing in the returns, and for series that are positively autocorrelated, the smoothing has the effect of diminishing the risk apparent in the asset class; hence, it is necessary to correct for the

smoothing, resulting in a more volatile desmoothed return series. Using the more simplified approach of Geltner [1993] does not completely eliminate the first-order autocorrelation in the time series for art. The more sophisticated approach from Okunev and White [2003], which takes into account higher orders of autocorrelation, does result in a desmoothed series that no longer suffers from hrst-order autocorrelation. The high positive autocorrelative structure present in the art series results in the desmoothed series exhibiting significantly higher volatility. By desnioothing the returns to account tor the autocorrelation in the data, the risk increases substantially from 6.5% to 11.5%,^ Taking a universal 5% increase in the monthly standard deviation for the art series can show how this increase affects the optimal portfolio allocation. It reduces the allocation in art substantially, by roughly half, from over 20% to just under 10%, with the reduction roughly equally spread among the other asset classes in the portfolio. The low correlation still results in art providing a highly attractive portfolio investment. World equity still remains unattractive given the slightly lower return-risk ratio than the other asset classes and the relatively high correlation with the U.S. equity market (in this case, 90%). This finding is seen

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EXHIBIT

13

Optimal Portfolio Allocation: 1980-2006 Panel A. Excluding Hedge Funds


PORTFOLIO MSCI US EQUITY MSCI UK EQUITY

us
CORP BONDS COMMOD FUTURES

US REAL ESTATE

UK 10 YEAR GOVT

AMR ALL ART INDEX

HEDGE FUNDS

NO ART WITH ART DESMOOTHED ART DESMOOTHED ART & TRANS COSTS

7.95% 6.84% 7.60% 7.79%

3.77% 1.55% 2.34% 3.17%

7.45% 5.63% 6.54% 7.07%

8.62% 5.83% 7.06% 7.97%

19.65% 17.32% 19.12% 19.42%

52.55% 41.39% 47.41% 50.39% 21.43% 9.93% 4.19%


1 1 1

Panel B. Including Hedge Funds


MSCI PORTFOLIO

us
EQUITY

MSCI UK EQUITY

us
CORP BONDS COMMOD FUTURES

us
REAL ESTATE

UK 10 YEAR GOVT

AMR ALL ART INDEX

HEDGE FUNDS

NO ART WITH ART DESMOOTHED ART DESMOOTHED ART & TRANS COSTS
Note: See Exhibit 7 notes.

0.00% 0.00% 0.00% 0.00%

0.00% 0.00% 0.00% 0.00%

2.96% 2.47% 2.67% 2.80%

3.04% 1.92% 2.34% 2.74%

10.20% 9.89% 10.84% 10.74%

42.55% 35.60% 39.17% 41.04% 15.91% 7.04% 2.82%

41.25% 34.21% 37.94% 39.87%

in Panel B of Exhibit 13. Art's high transaction costs spread over 25 years equal 1.5% a year. Despite these costs, art still remains an attractive, although small, portfolio allocation. Including Hedge Funds Hedge funds provide an attractive return per unit of risk, meaning that hedge funds also provide substantial risk-return benefits in a diversified portfolio. Including hedge funds in the portfolio allocation analysis results in a much higher allocation to hedge funds and art's allocation is reduced to only 3%. As shov^^n in Exhibit 9, the correlation ot hedge fund returns and mainstream asset classes is higher than between other alternative asset classes. This result is because hedge funds, rather than being an alternative asset class, offer investment strategies for investing in mainstream assets, primarily equities, and fixed income. Optimizing the portfolio with the inclusion of hedge funds in the four scenarios1) without art, 2) with art, 3) with desmoothed art, and 4) with desmoothed art and

transaction costs-^produces the portfolio allocations shown in Panel B of Exhibit 13. For each ot the four scenarios, the allocation into art is increasingly lower and there is a large percentage allocation into hedge flinds. Hedge funds over the period analyzed have been the preferred portfolio diversifier. SUMMARY AND CONCLUSIONS Faced with un der performing portfolios, investors are continually seeking alternative assets and sophisticated solutions to reap high returns while minimizing risk. This article has taken a close look at the financial implications of including art as an alternative asset class. This previously tiontransparent market is becoming more accessible via the increasing availability of indices and data on the art market. Additionally, art funds offer iivestors the opportunity to invest indirectly into the art market. Indirect investment into the art market results in losing the aesthetic pleasure from holding the art; however, financial gains can be made through pooling resources with the help of experts, while benefiting from diversification. The art fund market is still in its infancy. There

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AS .A FINANCIAL IN\T.STMENT

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are few altfrnatives, and these are only available to investors willing to invest at a substantial level. Entry levels are, at present, still high. In time, these funds may become more accessible to the mainstream investor through pooling joint interests. The results in this article show that art's low correlation with other asset classes offers diversification benefits from holding art in an investment portfolio. Optimal portfolio allocations using empirical returns over the past 25 years provide support for investors to consider art as an attractive, albeit small, addition to their investment strategy.

SHARP, Leon SPILLIAERT. Carl SPITZWEG, Alfred STEVENS, Marcus STONE. Abraham STORCK, Antonio TAPIES. David (younger) TENIERS. Fritz THAULOW. Archibald THO1U3URN, Giovanni Battista TIEPOLO, James JacquesJosepli TISSOT. Maurice UTRILLO. Louis VALTAT, Edouard VUILLARD, Andy WARHOL, Tom WESSELMANN. Jack Butler YEATS, Anders ZORN. Old Masters Osias 1 BEERT. Nicolaes BERCHEM, Louis Leopold BOILLY, Francois BOUCHER, Jan (elder) BRUECiHEL, Jan (younger) BRUEGHEL. CANALETTO, Annibate CARRACCI, John CONSTABLE, Aelbert CUYP, Arthur DEVIS. Carlo DOLCI, Sir Anthony van DYCK. Jean Honorc FRAGONARD. Frans I FRANCKEN, Thomas GAINSBOROUGH, Theodore C;ERIC:AULT. Luca GIORDANO, Jan van GOYEN, Jean-Bapti.ste GREUZE, Francesco GUARDI, Giacomo GUARDI, Giovanni Francesco GUERCINO. Jan Davidsz de HEEM. Egbert van HEEMSKERK. Meindert HOBBEMA. William HOGARTH, Mckhior de HONDECOETER,Jean Baptiste HUET, Jacob van HULSDONCK. Jan van HUYSUM. Julius Caesar IBBETSON. Antonio JOLI,Jacob JORDAENS. Jan van I KESSEL, Nicolas LANCRET, Nicolas dc LARGILLIERE, Sir Thomas LAWRENCE. Sir Peter LELY, Carle van LOO, Nicolaes MAES, Alessandro MAGNASCO, Michle MARIESC^HL Ben MARSHALL, Adam Frans van der MEULEN, Jan Miense MOLENAER. Klaos MOLENAER, Joos de MOMPER, Peter MONAMY,Jean Baptiste MONNtWER. George MORLAND, Alexander NASMYTH, CharlesJoseph NATOIRE, Jean Marc NATTIER, Aert van der NEER. Adriaen van OSTADE, Isaac van OSTADE. Jean Bapti.ste OUDRY, Giovanni Paolo PANINI, Jean Baptiste PATER. Ciianibattista PIAZZETTA, Giovan Battista PIRANESI, Guido RENI. Sir Joshua REYNOLDS, Marco RICCI, Sebastiano RICCI, Hubert ROBERT, George ROMNEY. Salvator ROSA. Thomas ROWLANDSON. Sir Peter Paul KUBENS. Jacob van RUYSDAEL, Salomon van RUYSI.:)AEL, Paul SANDBY, Francis (elder) SARTORIUS, John Nott SARTORIUS, Jan STEEN, George STUBBS. Giovanni Battista TIEPOLO, Ciovanni Domenico TIEPOLO, Jacopo TINTORETTO, Joseph Mallord William TURNER, Lucas van UDEN, Willem van de (elder) VELDE, Simon VERELST, Nicolas van VERENDAEL, Joseph VERNET, Paolo VERONESE, David VINCKEBOONS. Simon dc VLIEGER, Sebastian VRANCX. Jean Antoine WATTEAU, Jan WEENIX, Adam WILLAERTS, John WOOTTON, Philips WOUWERMAN, Joseph WRIGHT OF DERBY. Jan WYNANTS. Johann ZOFFAN Y, Francesco ZUCCARELLL

APPENDIX INDEX CONSTITUENTS General all Art


Pierre ALECHINSKY. Hek-ii ALLINGHAM, Sir Lawrence ALMA-TADEMA, Michael ANCHER, Karel APPEL, Ccorg UASELITZ, Jean Muhcl BASQUIAT, Albert IJIERSTADT, Pierre ONNARD, Fernando BOTERO, Francois B ( ^ U C : H E R , Eugene BOUDIN, Arttuir Merric Bloomficld BOYD. Georges BRAQUE, Bernard BUFFET, Sir Edward Cotey BURNE-JONES. CANALETTO, Marc CHAGALL, Sandro CHA, Giorgio de CHIRICO, Pieter CLAESZ, Jean Baptiste Camille COROT, Gustave COURBET, Salvador DALI, Montague DAWSON, Otto DIX. Jean HUBUFFET, Max ERNST, Henri FANTINLATOUR, Lyoncl FEININGER, Lucio FONTANA, Myles Birket FOSTER, Jean Honore FRAGONARD, Sam FI.ANC;iS, Thomas ClAINSBOROUGH, John William (ODWARD, Jan van GOYEN. Jean-Baptiste GiUZE, Atkinson GRIMSHAW, Francesco GUARDI. Keith HARING, Henri HARPIGNIES, Childe HASSAM. Pauli:esar HELLEUJohn Frederick (sur) HERRING, Ferdinand HOl )LER, Antonio JACOBSEN, Johan-Laurents JENSEN, Johan Barthold J O N C ; K I N D , AsgcrJRN. Jan van KESSEL, Ernst Ludwig KIRCHNER. Moise KISLING, Paul KLEE. Gustav KLIMT. Willem KOEKKOEK, Oskar KOKOSCHKA, Willem df KOONING, Nicolas de LARGILLIERE, Carl LARSSON. Marie LAURENCIN, Fernand LEGER, Lord Frederic LEKHTON, Sir Peter LELY, Bruno LILJEFORS, Nicolaes MAES, Kern- MAGI.ITTE, Michle MARIESCHI, Ben MA1.SHALL, Henri MATISSE, Sir John Everett MILLAIS. Joan MIRO. Claude MONET, Giorgio MORANDI, Sir Alfred MUNNINGS, Enl NOLDE, A R PENCK, Pablo PICASSO, Serge POLIAKOFF, Pierre Auguste RENOIR, Sir Joshua REYNOLDS, Jean-Paul RIOPELLE, Diego RIVERA, Hubert ROBERT, Dante Gabriel ROSSETTI, Salomon van RUYSDAEL, Gino SEVERINI, Dorothea

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European Impressionists
Laureano BARRAU, Jean BEIJ^UD, Eugene BOUDIN, Gustave CAILLEBOTTE, Paul CEZANNE, Edgar DEGAS, Jean Louis FORAIN, Paul GAUGUIN, Armand GUILLAUMIN, Albert LEBOURG, Stanislas LEPINE, Max LIEBERMANN, Edouard MANET, Henri -French MA1.TIN, Henri MATISSE, Maxime MAUFRA, Claude MONET. Berthe MORISOT, Rodenc O'CONOR, Camle FISSAlUi-O, Pierre Auguste RENOIR, Theodore ROUSSEAU. Alfred SISLEY, Max SLEVOGT, Joaquin SOROLLA Y BASTIDA.

Modern Artists
Pierre ALECHINSKY, Karel APPEL, Fernandez ARMAN, Edouard ARROYO, Fnnik AUERBACH, Francis BACON, Willi BAUMEISTER, WiUiam BAZIOTES, Max BECKMANN, Joseph BEUYS, Max BILL, Jules BISSIER, Fernando BOTERO, Louise BOURGEOIS, Alberto BURRI, Reg BUTLER, Alexander CALDER, Giuseppe CAPOGROSSI, Anthony CARO, Baldacdni CESAR, Lynn CHADWICK, John CHAMBERLAIN, Eduardo CHILLIDA, CHRISTO, CORNEILLE, Joseph CORNELL, Richard DIEBENKORN, Jim DINE, Piero DORAZIO. Jean DUBUFFET, Jean FAUTRIER, Lucio FONTANA, Sjni FRANCIS, Helen FRANKENTHALER, Alberto GIACOMETTI, Arshe GORKY, Adolph GOTTLIEB, Hans HRTUNG, Dame Barbara HEPWORTH. Patrick HERON, Eva HESSE, David HOCKNEY, Hans HOFMANN, Fnedricb HUNDERTWASSER, Robert INDIANA. Asger JRN, Wassily KANDINSKY, Paul KLEE, Yves KLEIN. Franz KLINE, Willem de KOONING, Wilfredo LAM, Peter LANYON, Roy LICHTENSTEIN, Richard LINDNER, Richard LONG, Morris LOUIS, Piero MANZONI, Giacomo MANZU, Marino MARINI, Agnes MARTIN, Georges MATHIEU, MATTA,Joan MITCHELL, Henry O M MOORE, Robert MOTHERWELL, Ernst Wilhelm NAY, Louise NEVELSON, Ben NICHOLSON, Isaniu NOGUCHI. Jules OLITSKI. Victor PASMORE, Serge POLIAKOFF. Jackson POLLOCK, Arnaldo POMODORO, Arnulf RAINER, ARNULF RAINER, Martial RAYSSE, Ad REINHARDT, Germaine RICHIER, Bridget RILEY, Jean-Paul RIOPELLE, Diego RIVERA, James ROSENQUIST, Mark ROTHKO, David SIQUEIROS, Pierre SOULAGES, Daniel SPOERRI, Nicolas de STAEL, Rufino TAMAYO, Antonio TAPIES, Wayne THIEBAUD, Mark TOBEY, Gnther UECKER, Emilio VEDOVA, Bram van VELDE, Maria Elena VIEIRA DA SILVA, Andy WARHOL, Tom WESSELMANN. Contemporary Artists Carl ANDRE, Richard ARTSCHWAGER, Miguel BARCELO, Matthew BARNEY, Georg BASELITZ, Jean

Michel BASQIAT, Vanesa BEECROFT, Ross BLECKNER, Christian BOLTANSKI, Maurizo CATTELAN, Sandro CHA, Francesco CLEMENTE, Tony CRAGG, Enzo CUCCHI, Olivier DEBRE, Wim DELVOYE, THOMAS DEMAND, RINEKE DIJKSTRA, Peter DOIG, STAN DOUGLAS, Marlene DUMAS, Tracey EMIN, Luis FHITO, Rainer FETTING, Eric FISCHL, P.& WEISS FISCHLI, Dan FLAVIN, Gnther FORC;, Lucian FREUD, GILBERT and GEORGE, Robert GOBER, NAN GOLLIIN, Felix GONZALEZ-TORRES, Douglas GORDON, DAN GRAHAM, Andreas GURSKY, Keitb HARING, Dainien HIRST, Jenny HOLZER. Gary HUME, Jrg IMMENDORF, Jasper JOHNS, Donald JUDD, Alex KATZ, Mike KELLEY, Ellsworth KELLY, Anselm KIEFER, Martin KIPPENBERGER, JefT KOONS, Jannis KOUNELLIS, Sol LEWITT, Robert LONGO, Sarah LUCAS, Robert MANGOLD, Brice MARUEN, Mario MERZ, Juan MUNOZ, Bruce NAUMAN, Shirin NESHAT, Chris OFILI, Claes OLDENBURG, Gabriel OROZCO, Nam June PAIK, Mimmo PALADINO, PANAMERENKO, A R PENCK, Michelangelo PISTOLETTO, Sigmar POLKE, Richard PRINCE, Robert 1J\USCHENBERG, Charles American RAY. Gcrbard RICHTER. Pipotti RIST, Mimmo ROTELLA, Susan ROTHENBERG, Thomas RUFF, Edward RUSCHA, Niki de SAINT-PHALLE, David SALLE, Antonio SAURA, Jenny SAVILLE. Julian SCHNABEL, Thomas SCHUTTE, Sean SCULLY, George SEGAL, Richard -American SERRA, Andres SERI^J^NO, Joel SHAPIRO, Cindy SHERMAN, Jose Maria SICILIA, Frank STELLA, Thomas STRUTH, Donald SULTAN, Rosemarie TROCKEL, Luc TUYMANS, Cy TWOMBLY. Jeff WALL, Franz WEST, Christopher WOOL,

ENDNOTES 'Frey and Eichenberger [1995]. ^Data are only available until December 2(102 on tbe All Art Index. A description of tbe artists included in the various indices ^ is in the appendix. ^Similar survivorship bias is also apparent in other financial indices. "The MSCI indices are extremely highly correlated witb tbe national stock market indices, for example, tbe S&P 500 and the FTSE lOU. Data on the MSCI indices arc available on a monthly basis for the whole sample. ''See Okunev and White [2003] for greater detail on the conditions that the autocorrelation function must fulfill and on the apphcation to remove higher orders of autocorrelation. "See Campbell |2OO5] for a detailed analysis on desmoothing art series data.

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Granipp, W, Pricinii the PricelessArt, Artists and Economics. New York: Basic Books, 1989. Kochugovindan, S. Barclays Capital Equity Gilt Study. London: Barclays Bank, 2005, Mei. J.. and M. Moses. "Art as an Investment and the Underperiormance o Masterpieces," American Economic Review, 92(2002), pp. 1656-1668. . '"Vested Interest and Biased Price Estimates: Evidence from an Auction MarkeC fournal of Finance, 60 (2005), pp. 2409-2435, Okunev,J., and ]). White. "Hedge Fund Risk Factors and Value at Risk of Credit Trading Strategies." Working paper. University of New South Wales, 2003. Pesando, J.E. "Art as an Investment: The Modern Market for Modern Prints." American Economic Revieir, 83 (1993). pp. 1075-1089. Stein, J.P "The Monetary Appreciation of Paintings." Journal of Political Economy, 85 (1977), pp. 1021-1035. Zanola, R. "The Dynamics of Art Prices: Selection Corrected Repeat-Sales Index." Working paper. University of Eastern Piedmont, 2007.

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