Abstract
Art has been suggested as a good way to diversify investment portfolios during times of financial uncertainty. The argument is that art exhibits different risk and return characteristics to conventional investments in other asset classes. The new Citadel art price index offered the opportunity to test this theory in the South African context. Moreover, this paper tests whether art prices are efficient. The Citadel index uses the hedonic regression method with observations drawn from the top 100, 50 and 20 artists by sales volume, giving approximately 29 503 total auction observations. The Index consists of quarterly data from the period 2000Q1 to 2013Q3. A vector autoregression of the art price index, Johannesburg stock exchange all-share index, house price index, and South African government bond index were used. Results show that, when there are increased returns on the stock market in a preceding period and wealth increases, there is a change in the Citadel art price index in the same direction. No significant difference was found between the house price index and the art price index, or between the art and government bond price indices. The art market is also found to be inefficient, thereby exacerbating the risk of investing in art. Overall, the South African art market does not offer the opportunity to diversify portfolios dominated by either property, bonds, or shares.
Highlights
Portfolio diversification is widely accepted as an effective strategy to reduce the risk of investment for both businesses and households (Teresiene & Paskevicius, 2009; Hagin, 2003) – a strategy emphasised in South African media reports (Greeley, 2013; Kerrigan, 2013)
Though investment in art could potentially offer an effective portfolio diversification strategy for portfolios dominated by South African government bonds, the relationship is not statistically significant
As a whole when there are increased returns on the stock markets in the preceding period and wealth increases, there is a change in the Citadel art price index in the same direction
Summary
Portfolio diversification is widely accepted as an effective strategy to reduce the risk of investment for both businesses and households (Teresiene & Paskevicius, 2009; Hagin, 2003) – a strategy emphasised in South African media reports (Greeley, 2013; Kerrigan, 2013). Small compared to the world market but has seen some substantial growth in the past few years, especially with the establishments of new art fairs and galleries It has a modest number of famous artists that have realised international fame and substantial commercial success, but this does not mean that there are not lucrative opportunities for investment. Given the structure of art markets and the higher risk implications of insider information often present on reserve prices (David, Oosterlinck & Szafarz, 2013), the paper explores whether South African art prices are efficient
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