Perpetual options: revisiting historical returns on paintings

摘要

This paper applies a perpetual option-pricing model in examining historical returns on paintings. A key development of the paper is formalizing a structural relationship between rational investment decisions and historical returns to art ownership. In this regard the options’ framework yields choice-theoretic implications on the relationship among risk, convenience yields from art ownership, and investor ‘hurdle prices’—prices triggering the purchase and sale of artworks at auction. The methodology offers testable implications concerning the adjustment dynamics in the relationship between historical art returns and risk-free yields. The implications are examined in a case study of paintings of major art schools using error correction methodology. We find evidence of a long-run equilibrium relationship between painting types and risk-free bond yields, and some indication of buyers and sellers preferring exchange environments not prone to “speculative resales.”