Art as an Investment and the Underperformance of Masterpieces

Two major obstacles in analyzing the art market are heterogeneity of artworks and infrequency of trading. This paper constructs a new data set of repeated sales of paintings and estimates an annual index of art prices for the period 1875-2000. Contrary to earlier studies, it is found that art outperforms fixed income securities as an investment, though it significantly under-performs stocks in the art index. 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. The evidence is mixed on whether the law of one price holds in the New York auction market.