Risk and Return in Online Auctions

Though traditionally, stock markets have been the best haven for investors, in recent years the concept of risk has been brought home to investors. With the stock markets crashing from over 11,000 to under 8,000 and then crossing 10,000 in less than three years, many investors are considering non-stock investments as an alternative to traditional equity markets that have been highly volatile in recent years. Rare coins are often considered a good investment because they tend to hold their value rather well. Lately, online auctions have been quite prolific in joining potential buyers and seller of rare coins. In this exploratory study, I use theory from finance literature to examine risk and return in online rare coin markets. I examine 42,839 rare coin auctions involving 604 distinct rare coins collected in a 140-day period, and find the beta, the traditional measure of risk in the stock market, does not perform as well as variance of returns as a proxy of risk when predicting returns. This leads to the conclusion that the typical coin collector or coin reseller views coin purchases as stand-alone investments, and not with the perspective of how much a coin adds to a inventory (as a dealer) or a collection (as a collector). Thus, results show that bidders of rare coins in online auctions do not adjust for diversifiable risk, neither within in the coin market nor across markets when the coin market is compared with the stock market. I also find a degree of inefficiency within the coin market, indicating some opportunity for arbitrage profits for coin investors.