Is There a Bubble in the Art Market?

Abstract

Abstract:The record-breaking prices observed in the art market for the last three years have rais the question of whether we are experiencing a speculative bubble. Given the difficulty to determine the fundamental value of artworks, we apply a right-tailed unit root test with forward recursive regressions (SADF test) to detect explosive behaviors directly in the time series of four different art market segments ("Impressionist and Modern", "Post-war and Contemporary", "American", and "Latin American") for the period from 1970 to 2013. We identify two historical speculative bubbles and find an explosive movement in today's "Post-war and Contemporary" and "American" fine art market segments. AbstractThe record-breaking prices observed in the art market over the last three years raise the question of whether we are experiencing a speculative bubble. Given the difficulty to determine the fundamental value of artworks, we apply a right-tailed unit root test with forward recursive regressions (SADF test) to detect explosive behaviors directly in the time series of four different art market segments ("Impressionist and Modern", "Post-warand Contemporary", "American", and "Latin American") for the period from 1970 to 2013. We identify two historical speculative bubbles and find an explosive movement in today's "Post-war and Contemporary" and "American" fine art market segments.Keywords: Art market; Alternative investments; Speculative bubbles; Explosive behavior JEL Codes: G12, G14, Z11 You can reach the authors via roman.kraussl@uni.lu, thorsten.lehnert@uni.lu, and nicolas.martelin@uni.lu. We thank Ali Nasser Edine for helpful comments.2

Empirical Analysis of Investments on the Fine Art Market

“…The best returns are presented in the 0.75 quantile, which means that prices of the most expensive paintings have gone up significantly. In this case the most attractive sector is postwar art market because it has the highest value of the average price index and lower dispersion of the index comparing with the contemporary art which is the most speculative sector as we can see (however [23] argue that all segments -"Impressionist and Modern", "Post-war and Contemporary", "American" and "Old Masters" -are likely to demonstrate the speculative behaviors, if they are compared with other markets). The art of old masters along with impressionism is not very interesting for investors.…”

Behavioural heterogeneity in wine investments

“…This emotional aspect is shown to affect prices of collectibles (see Renneboog and Spaenjers, 2013), and can lead to speculative bubbles (e.g. Penasse and Renneboog, 2017;Kräussl, Lehnert and Martelin, 2016).…”

Art Markets and Digital Histories

“…The concept brings together the social and behavioral underpinnings of the art market, different from existing studies on the art market bubbles that focus on the speculative bubble revealed in the price of artworks fetched in the contemporary auctions (c.f. Kräussl et al 2016). 15 A social bubble is defined as "strong social interactions between enthusiastic supporters weave a network of reinforcing feedbacks that lead to widespread endorsement and extraordinary commitment by those involved, beyond what would be rationalized by a standard cost-benefit analysis in the presence of extraordinary uncertainties and risks."…”