Abstract
This paper estimates the fair returns on art after accounting for transaction costs. We show that the mostly used methodologies become impractical when accounting for these costs. Based on the largest up-to-date database of repeat sales of fine art, we find that the average annual returns on art investment are significantly upwardly affected by the abnormal returns of the 1970s and 1980s. Including art in an optimal portfolio greatly depends on the sample period. We further find strong evidence supporting the existence of the masterpiece effect.
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