Art as an Investment and the Underperformance of Masterpieces: Evidence from 1875-2000

This paper constructs a new data set of repeated sales of artworks and estimates an annual index of art prices for the period 1875-2000. Contrary to earlier studies, we find art is comparable to government bonds as an investment, though it significantly under-performs stocks in the US. Art is also found to have lower volatility and lower correlation with other assets, making it more attractive for portfolio diversification than discovered in earlier research. There is strong evidence of underperformance of masterpieces, meaning expensive paintings tend to under-perform the art market index. A further study reveals that the underperformance is consistent with the presence of a “winner’s curse” due to excessive bidding. There is no evidence, however, that the "law of one price" is violated in the New York art auction market. (JEL G14, Z10) 1 Department of Finance and Department of Operations Management, Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012-1126. We have benefited from helpful discussions with Will Goetzmann, Robert Solow and Larry White on art as an investment. We are grateful to Jennifer Bowe, Jin Hung and Loan Hong for able research assistance. We would also like to thank Mathew Gee of the Stern Computer Department for his tireless efforts in rationalizing our database. We also wish to thank John Ammer, John Campbell, Victor Ginsburgh, Robert Hodrick, Burton Malkiel, Tom Pugel and seminar participants at Temple University for helpful comments and John Campbell for his latent variable model algorithm. All errors are ours. © Jianping Mei and Michael Moses.