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

By Arthur Korteweg, Roman Kräussl and Patrick Verwijmeren

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

Publisher: Oxford University Press
Year: 2016
OAI identifier: oai:eprints.gla.ac.uk:123152
Provided by: Enlighten

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