“When bankers get together for dinner, they discuss Art. When artists get together for dinner they discuss money.” (Oscar Wilde)
Works of art are unique and highly heterogeneous but if they are traded, they share the common purpose of creating income. However, not only artists will discuss money at dinner, also bankers while they discuss art, are likely to talk about financial gains through investments in art. In economics a small group of researchers has examined whether this kind of investment is profitable or not. Although findings are not consistent, some authors conclude that art, compared to equity or bonds, does perform relatively well and offers diversification benefits in investment portfolios. Despite the inconsistency of findings, this research has led to a growing interest in art investment. Promoters of art investment like art investment funds work on a transformation of art into a new and widely accepted asset class, which they hope will prospectively be included in investment portfolios in the same way as real estate (Picinati di Torcello (2012): 15).
Investment in art is determined by the expected price appreciation of art works in the future (Stein (1977): 1021). The quantity of original artworks, at least by deceased artists, cannot be augmented and the elasticity of supply is zero (Baumol (1986): 10). The future prices of art works as investment goods will thus depend on demand as well as on wealth of individuals and institutions at the sales date (Goetzmann (1993): 1371). The greater the purchasing power of prospective buyers, the more art is being bought and the higher art prices will be (Goetzmann et al. (2009): 2). Consequently art prices are expected to react to changes in economic prosperity and to fluctuate in the course of the business cycle.
Business cycle research is a vital branch of macroeconomics and many theories and studies exist which examine the boom and bust periods of the economy as different phases of business cycles. Contrary there is little research which looks at “the link between the art market and the broader economy” (ibid: 4).This master thesis aims at contributing insights on this link by analysing the behavior of art prices under different macroeconomic conditions. Precisely, the objective is to assess the characteristics of art prices as business cycle indicator for the U.S. economy. [...]
Table of Contents
1. Introduction
2. Theoretical background
2.1 Art as an investment object
2.1.1 Integration of art as an asset into investment portfolios
2.1.2 Art market composition and key players in the global art trade
2.2 Primary features of business cycle
2.2.1 Moving from a stationary to a booming economy
2.2.2 Looming recession and financial crises
2.3 Can prices at art auctions be used to predict shifts in the business cycle?
2.3.1 Classical versus growth cycle analysis
2.3.2 Art prices as business cycle indicator: direction and timing
3. Methodology
3.1 Data and summary statistics
3.2 Analysis of stationarity and data filtering
3.2.1 Stationarity - Augmented Dickey Fuller (ADF) test
3.2.2 Applying the Hodrick Prescott filter
3.3 Cross-correlation with GDP
3.4 Granger Causality and analysis of stability
3.4.1 Granger Causality
3.4.2 Analysis of stability
4. Conclusion
Research Objectives and Themes
This thesis investigates whether art prices at auctions can serve as a reliable indicator for predicting fluctuations in the U.S. business cycle. By analyzing the behavior of various art indices alongside macroeconomic variables, the study aims to determine if art markets lead or lag economic performance, thereby providing potential signals for future economic development.
- Art market as an emerging asset class
- Economic business cycle dynamics (boom and bust phases)
- Econometric modeling of art prices (HP filtering and Granger causality)
- Comparative analysis of art price indices vs. GDP growth
Excerpt from the Book
2.2.1 Moving from a stationary to a booming economy
Market economies share a key element in the expansion phase of business cycles: the willingness to strike up financial risk surges, when expectations of return on investment are bright. Hyman P. Minsky`s (2008) documented this coherence in his book “stabilizing an unstable economy” and his primary concern looking at business cycles was not the contraction period and slump. Rather he was concerned with the instability caused by the transition from tranquil and sustained growth to a speculative boom (ibid: 193). Despite differences between capitalist economies, Minsky saw similar characteristics between them (Tymoigne (2009): 116).
Investment is the vital element in Minsky’s analysis of business cycles. As he states, it “is the essential determinant of the path of a capitalist economy” (Minsky (2008): 191). His theory of investment is “fundamentally financial” (Fazzari et al. (2001): 99) because “the stability of the economy depends upon the way investment and positions in capital assets are financed” (Minsky (2008): 192). In a capitalist economy investment is often financed by resorting to external funds, i.e. credit or issuing equities. Therefore a decision to invest does not only include considerations of expected cash flows and prices of investment goods, but also financing costs as reflected by the risks faced by lenders and borrowers of external funds (ibid: 206).
Summary of Chapters
1. Introduction: Discusses the growing interest in art as an asset class and outlines the thesis's objective to examine art prices as a business cycle indicator.
2. Theoretical background: Explores art as an investment object and presents the Minskyan perspective on business cycles, focusing on the transition from growth to speculative booms.
3. Methodology: Details the data sources, filtering techniques such as the Hodrick-Prescott filter, and econometric tests like Granger Causality used to analyze the link between art prices and GDP.
4. Conclusion: Summarizes findings, noting that while art prices are volatile, they often track business cycle movements and can provide some predictive insight, though with limitations.
Keywords
Art investment, Business cycle, Economic indicator, Art market, Real GDP, Hodrick-Prescott filter, Granger causality, Speculative boom, Portfolio diversification, Asset prices, Macroeconomics, Financial instability, Forecasting, U.S. economy, Auction prices
Frequently Asked Questions
What is the core focus of this research?
The research focuses on analyzing whether the price fluctuations in the international art auction market can serve as a predictor for shifts in the U.S. business cycle.
What are the primary themes covered?
The thesis covers the transition of art into an investment asset, the mechanics of Minsky’s financial instability hypothesis, and econometric methods to assess the relationship between art market performance and macroeconomic trends.
What is the primary goal of the thesis?
The primary goal is to determine if art prices contain relevant information about future economic development and can thus act as a leading or coincident indicator for the broader economy.
Which scientific methods are employed?
The study uses quantitative methods, including the Hodrick-Prescott filter for data detrending, cross-correlation analysis between art indices and GDP, and Granger causality tests to investigate short-term causal relationships.
What topics are discussed in the main body?
The main body covers the theoretical foundation of art as an asset, the primary features of the business cycle, detailed methodology for data analysis, and empirical results regarding the cyclical properties of art prices.
Which keywords characterize this work?
Key terms include art investment, business cycle, economic indicator, financial instability, and Granger causality.
How does the author define the "margin of safety" in investment?
The author, referencing Kregel, defines the margin of safety as the difference between prospective cash receipts and cash commitments, serving as a financial cushion against unforeseen economic events.
What role does the "Old Masters" index play in the findings?
The Old Masters 100 index often deviates from other indices, appearing in some instances as a procyclical and lagging indicator, suggesting different demand dynamics compared to modern or contemporary art.
- Arbeit zitieren
- Jonatan Steinig (Autor:in), 2015, Art Prices as Business Cycle Indicator, München, GRIN Verlag, https://www.grin.com/document/301197
