Investment in early American art: the impact of transaction costs and no-sales on returns

Art, along with other "treasure assets," has become a central object for investment opportunities. Investment return studies using hedonic and resale price regressions on different artistic periods and styles produce estimates of varying rates of return, predominately low rates with high standard deviations. The present study employs a new sample of American art sold at auction between 1987 and 2011—art created before 1950 by 33 artists born prior to 1900. Our study, unlike those that preceded it, considers works that are no-sales (those "bought-in" for failing to sell at auction at or above a predetermined and negotiated minimum price), in addition to full transaction costs—buyers and sellers premia on hammer prices. We conclude that investment return calculations are biased upward and may be negative when these factors are considered and that the "consumption utility" of art may be higher than previously thought. However, using a variant of the capital asset pricing model, we find that investment in early American art may still be desirable in a diversified portfolio of assets for when the price of stock assets falls, the price of art does not fall in the same proportion.