research@hec - Issue #23 - (Page II)

Art Market research hec Christophe Spaenjers Understanding Changes in Prices In 2007, the British artist Damien Hirst sold a sculpture of a skull cast in platinum and covered with 8,601 diamonds for $100 million. At least this work had an unusual intrinsic value in the cost of its materials. But what about another record breaker, Picasso’s “Boy with a Pipe”? How are prices determined on the art market? What factors explain their evolution? to economic fluctuations. From an economist’s point of view, the question of the fluctuating value of works of art is intriguing. William Goetzmann, Luc Renneboog, and Christophe Spaenjers tackle the problem, seeking to explain what determines changes to prices in the art market — a market characterized by the singularities of individual buyers and its sensitivity BIOGRAPHY Christophe Spaenjers recently defended his thesis at the University of Tillburg and joined HEC Paris as a professor of finance in September 2011. His research looks at traditional finance questions such as investment choices, investor behavior, international finance, household finance, and corporate finance. He is also interested in specific investment markets, including art, stamps, and wine. Art Prices (in real GBP) 1830-2007 1 000.0 Logarithmic scale. Annual art price index in real GBP for the period 1830-2007. The value of the index for 1830 is put equal to 1. 1 00.0 1 0.0 1 .0 0.1 1880 1980 1905 1830 1855 1930 1955 ART MARKET AND ECONOMIC CONDITIONS The three researchers make a unique contribution to the art market by building an index of price changes in art that span more than a century (see methodology). They model the return on investment by evaluating changes in auction prices. Conceived for the British market, the evolution of this index suggests a relationship with changing economic conditions. In effect, prices fell during periods of economic turmoil (World War I, Great Depression in the 1930s, and the oil crisis in 1973) while they increased during the economic boom of the 1960s, the art market boom of the 1980s, and the 2000s (at least until 2007). It is also worth noting that the researchers’ index shows in real terms that price levels in 1913 were not matched again until 1968, despite years of sustained economic growth. WHAT’S THE RELATIONSHIP BETWEEN THE ART MARKET, STOCK MARKETS, INCOME INEQUALITIES, AND WEALTH? The resale value of a work of art is not capped since it is only limited by the price that collectors are willing to pay for it. So demand determines market price, which is why the researchers look at the income levels of the richest — the main art buyers — to attempt to explain variations in art prices. To account for changes in income, they study changes in equity markets. They also extend their analysis II research@hec • october-november 2011 2005

Table of Contents for the Digital Edition of research@hec - Issue #23

Art Market: Understanding Changes in Prices
Rumors: How They Spread and How to Combat Them
The Resource—Performance Link : Why Your Competitor’s Resources Should Matter to You
HEC PARIS News

research@hec - Issue #23