Art as an Asset Class

Art as an Asset Class

Investing in Art

Gustav Klimt, "The Kiss"

The difficulty of investing in the art market derives from the art market's inefficiency, from the know-how and expertise that the art market requires, and from the uncertainty surrounding tax issues.

The art market is definitely not an efficient market. The drivers of this are:

The traded products are differentiated: the art markets are seriously incomplete and often very thin, with very few works of art of a specific author traded each year.
Market transparency is low.
There are potentially large differences in expertise between buyers and sellers.
There is low liquidity: buyers and sellers are often distant in terms of space and time, and there is not always an available buyer or seller.
Transaction costs (for example, auction fees, insurance and handling costs) are by far larger than in other markets.
There are psychic benefits of owning art, which are largely absent in the case of owning financial assets.

Additionally, as Baumol notes, the art markets have a much weaker equilibration process (the process by which market prices tend to the equilibrium price) than other securities. This is because:

Elasticity of supply is equal to zero for works of deceased artists.
Each individual work of art is unique, while the inventory of a particular stock is made up of a large number of homogeneous securities, all perfect substitutes for one another.
The owner of a work of art has a monopoly on that specific object, while a given stock is held by many individuals who are potentially independent traders on a near perfectly competitive stock market.
The purchase and sale of a work of art is an infrequent occurrence and may happen even only once in a century.
The acquisition price of a work of art is not generally public information and is often only known to the parties immediately involved.
The equilibrium price is unknown, so an objective evaluation (such as a present value of future cash flows) is often impossible.

Successful investment in art requires not only extensive know-how about the artistic quality and authenticity of the object to be acquired but also about peculiarities of the art market. Additionally, it requires the investor to establish a scenario of future economic and social developments, also including international factors such as exchange rate movements, special cultural factors and market preferences.

Tax uncertainties add to the difficulty of investing in art and no study seriously takes into account the tax effect of investing in art. In many countries investment in art is one of the major possibilities of escaping or at least reducing the tax burden. And this is even more important as it is often unclear which country's tax code applies.

Introduction	My Approach
What is Art?	A. Data Used
Investing in Art	B. My Methodology
Past Studies of Returns in the Art Market -- A. Studies	C. My Results
B. Techniques	D. My Conclusions
C. Summary	Bibliography

Contact information: luisa.rubino@duke.edu