Abstract
The art market is subject to booms and busts in both prices and volume, which are difficult to reconcile with models where agents trade to consume. This paper shows that: (i) a high trading volume coincides with higher prices and more speculative trades, (ii) a high volume predicts negative returns, especially in the most volatile art schools, (iii) a substantial increase in transaction costs decreases art prices and can destroy the return-volume relation, and (iv) short-term transactions underperform and are riskier than long-term transactions. The evidence is consistent with a resale option model of speculative trading where the impossibility to sell short embeds a bubble component in prices. This paper suggests that speculative trading can generate significant price bubbles, even when trading costs are huge.
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