Morningstar Advisor - August/September 2012 - (Page 64)

Gray Matters The Chinese Art Market and the Origin of Bubbles By James X. Xiong How major market crashes around the world can be quantitatively explained. The Chinese art and calligraphy market has been on fire. Between 2000 and 2011, the market, represented by the Chinese Painting 400 Index, gained more than 700%, or about 21% per year. More impressively, it gained about 353% from June 2009 to June 2011. Do these kinds of extreme gains seem familiar? We have witnessed many similar asset-price bubbles. The story is the same. Positive feedback and herding among speculative investors produce runaway prices until the deviation from equilibrium is so large that the market becomes unstable, creating a high probability (or an inevitability) of a crash. This is clearly happening in the Chinese art market. There’s certainly herding behavior and positive feedback among Chinese art investors. The past decade’s economic boom has created new wealth in China and rising demand for Chinese fine art and calligraphy, driving up prices. Increasing prices in turn attract more art investors and speculators, who are desperate to join the party. They see past price appreciations and become very confident that they, too, can sell their art at higher prices than what they paid for them. And so it goes, on and on. But when will this mania for Chinese art end? More important for us, do the Chinese art-market boom and other asset-price bubbles share the same characteristics, and do all bubbles originate in the same manner? If yes, can we identify these factors beforehand and predict when a bubble will burst? 64 Morningstar Advisor August/September 2012

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2012

Morningstar Advisor - August/September 2012
Letter From the Editor
How Much of the Behavior Gap Is Your Fault?
What’s Your View of the Muni-Bond Market?
A Balanced Life
How to Get to Know EMMA
A Strong, Robust Fund Business
Dividend Investing Abroad
Four Picks for the Present
Investment Briefs
Fund Expenses Through the Decades
Autos on Comeback Track
Lessons From the Muni-Bond Rebound
Municipal-Bond Landscape Shifts
Municipal Bonds 101
A Tale of Two Cities
Unraveling the Mysteries of Money
Small Companies Mean the World to Him
The Chinese Art Market and the Origin of Bubbles
The Myth of the Dumb Investor
Stocks That Can Stand the Heat
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The War on Savers

Morningstar Advisor - August/September 2012