Art investment in South Africa: Portfolio diversification and art market efficiency

Abstract

Art has been suggested as a good way to diversify investment portfolios during times of financial uncertainty. The argument is that art exhibits different risk and return characteristics to conventional investments in other asset classes. The new Citadel art price index offered the opportunity to test this theory in the South African context. Moreover, this paper tests whether art prices are efficient. The Citadel index uses the hedonic regression method with observations drawn from the top 100, 50 and 20 artists by sales volume, giving approximately 29 503 total auction observations. The Index consists of quarterly data from the period 2000Q1 to 2013Q3. A vector autoregression of the art price index, Johannesburg stock exchange all-share index, house price index, and South African government bond index were used. Results show that, when there are increased returns on the stock market in a preceding period and wealth increases, there is a change in the Citadel art price index in the same direction. No significant difference was found between the house price index and the art price index, or between the art and government bond price indices. The art market is also found to be inefficient, thereby exacerbating the risk of investing in art. Overall, the South African art market does not offer the opportunity to diversify portfolios dominated by either property, bonds, or shares.

An Institutional Politics of Place: Rethinking the Critical Function of Art in Times of Growing Inequality

“…Upton-Hansen, 2018), and indeed existing research has evidenced the direct link between the two. In separate analyses, Goetzmann et al (2011) and Botha et al (2016) for example found a positive lagged relationship between stock-market performance and art price indexes. Consequently, noting the highly unequal participation in stock-market gains, art prices have been found to be widely impacted by economic inequality:…”

“…Upton-Hansen, 2018), and indeed existing research has evidenced the direct link between the two. In separate analyses, Goetzmann et al (2011) and Botha et al (2016) for example found a positive lagged relationship between stock-market performance and art price indexes. Consequently, noting the highly unequal participation in stock-market gains, art prices have been found to be widely impacted by economic inequality:[B]uilding a regression on the income tax data of Atkinson and Piketty (2010), [researchers] show that ‘art prices rise when income inequality goes up’, with robust conclusions that a one percent increase in the share of total income earned by the top 0.1 percent triggers an increase in art prices of about 14 percent.…”

What can we learn from the analysis of the fine wines market efficiency?

“…For example, in the academic literature, the search for an inefficiency market and ways to exploit it has mainly been examined in stock markets (Fama, 1970; Urquhart & McGroarty, 2016), bond markets (Hotchkiss & Ronen, 2002; Zunino et al, 2012), the exchange rate (Taylor & Sarno, 2004) and CDS markets (Kiesel et al, 2016). The theory of price efficiency has also been studied in commodity markets (Charles & Darné, 2009; Kristoufek & Vosvrda, 2014; Smith, 2002) and alternative markets such as art (Aye et al, 2017; Botha et al, 2016; Goetzmann, 1995; Munteanu & Pece, 2015), real estate (Crockett, 1982; Darrat & Glascock, 1993; Gatzlaff & Tirtiroglu, 1995; Clayton, 1998; Kleiman et al, 2002) and bitcoin (Wu & Pandey, 2014; Urquhart, 2016; Kristoufek, 2018; Vidal‐Tomás & Ibañez, 2018; Wei, 2018; Jena et al, 2020).…”