Financial Implications of Investing in the Global Art Market: Risk, Return and Diversification
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Authors
Grimmer, Teri O.
Issue Date
2020-03-04
Volume
Issue
Type
Dissertation
Language
en_US
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Abstract
The global art market is a 60+ billion-dollar industry (Deloitte 2019); art indices measure market sentiment. Yet, art’s influence on economic and financial markets is often overlooked in academic research. This study considers the financial implications of investing in the global art market including the variability between art indices providers. Using several financial market measures, and three independent providers of art indices—Artprice (AP), Art Market Research (AMR) and Sotheby’s (SMM)—this studyexplores risk, return, and portfolio diversification following Markowitz’s (1952) mean-variance optimization and efficient frontier models. The indices cover a range of years from 1858 through 2018. The art market data are externally developed by three distinct providers, mitigating selection bias and consists of comprehensive all-art indices and several sub-indices. The financial markets comprise U.S. security performance measures including the S&P 500, Russell 2000, T-Bills, and Corporate and Government Bonds. Consistent with portfolio theory, this research explores diversification prospects through construction of a financial portfolio adding art as a real asset. One-of-a-kind artworks are more complex to evaluate than traditional collectibles, since they are difficult to compare; therefore, this research explores asset allocation by adding art and a traditional collectible (classic cars) when salient to the milieu, to identify underlying trends in a financial portfolio. Diversification benefits of investing in subcategories of art are also examined by constructing art-asset portfolios. This research is unique in that it considers the viability of investing in art with three art indices simultaneously to track co-movements in the art investment field.
The findings of this research suggest that the risk and return on art differ depending on indices provider, the period of time examined, and the category of art, and that therefore generalization of art as an investment depends upon several factors. Contemporary Art dominated categories of paintings; however, the return on Sculpture was not consistent between periods nor art indices. While AMR’s index outperformed equities 1998–2018 (11.0% vs. 8.1% S&P 500), SMM and AP underperformed at 5.3% and 2.8%, respectively. AMR slightly underperformed the market from 1976–2018 by 0.5%, SMM underperformed the S&P 500 by 4.0%. The rate of return for Old Masters varied depending upon time period and art indices providers and underperformed consistently. The S&P 500 had higher volatility than the art market. However, all comprehensive art market measures outperformed T-Bills with higher volatility. The findings support that investments in art-assets do provide diversification benefits in both multi-class and art-asset portfolios and may provide asset allocation strategy opportunities for investors in portfolio selection. Using AP, AMR, and SMM to proxy the art market—and S&P 500 to proxy the stock market—the empirical results suggest there is no significant correlation between the three art market measures. There was a significant correlation between AP and the S&P 500; however, correlation of AMR and SMM with S&P 500 was low during the period studied and may suggest that the underlying assets in the construction of the index (selection bias) may be the differentiating factor. The SMM decade-by-decade results support the low correlation between the art and stock markets historically, except during economic downturns.
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Publisher
Creighton University
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Copyright is retained by the Author. A non-exclusive distribution right is granted to Creighton University and to ProQuest following the publishing model selected above.