Does it pay to invest in art? A selection-corrected returns perspective

Korteweg, A., Kräussl, R. and Verwijmeren, P. (2016) Does it pay to invest in art? A selection-corrected returns perspective. Review of Financial Studies, 29(4), pp. 1007-1038. (doi: 10.1093/rfs/hhv062)

Abstract

This paper shows the importance of correcting for sample selection when investing in illiquid assets that trade endogenously. Using a sample of 32,928 paintings that sold repeatedly between 1960 and 2013, we find an asymmetric V-shaped relation between sale probabilities and returns. Adjusting for the resulting selection bias reduces average annual index returns from 8.7% to 6.3%, lowers Sharpe ratios from 0.27 to 0.11, and materially impacts portfolio allocations. Investing in a broad portfolio of paintings is not attractive, but targeting specific styles or top-selling artists may add value. The methodology naturally extends to other asset classes.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Verwijmeren, Professor Patrick
• Authors: Korteweg, A., Kräussl, R., and Verwijmeren, P.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Review of Financial Studies
• Publisher: Oxford University Press
• ISSN: 0893-9454
• ISSN (Online): 1465-7368
• Published Online: 27 October 2015
• Copyright Holders: Copyright © 2016 Oxford University Press
• First Published: First published in Review of Financial Studies 29(4):1007-1038
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher