Articles

A Model of Trading in the Art Market

S. LOVO, C. SPAENJERS

American Economic Review

March 2018, vol. 108, n°3, pp.744-774

Departments: Finance, GREGHEC (CNRS)

Keywords: art; auctions; endogenous trading; price indexes; private values; returns

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2404339


We present an infinite-horizon model of endogenous trading in the art auction market. Agents make purchase and sale decisions based on the relative magnitude of their private use value in each period. Our model generates endogenous cross-sectional and time-series patterns in investment outcomes. Average returns and buy-in probabilities are negatively correlated with the time between purchase and resale (attempt). Idiosyncratic risk does not converge to zero as the holding period shrinks. Prices and auction volume increase during expansions. Our model finds empirical support in auction data and has implications for selection biases in observed prices and transaction-based price indexes


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