MAURICE Stephanie NOEL Laurent Audencia Nantes - School of Management smaurice@audencia.com lnoel@audencia.

com ACEI 2012: Profitability of investments in art: :results and perspectives (Draft)

May, 2012

The proposed article reviews the research on the evolution of art prices and provides new findings on the basis of recent research. The obtained results can help guide managers of investment funds and art collectors who want to indulge their passion but without neglecting the issues raised by the heritage aspect of their collection.

Introduction After World War II, market prices of art have experienced a significant increase. From the 1960s, the opinion according to which the profitability of investments in art would be higher, equal or bigger than financial investments, has spread (Rush, 1961; Keen, 1971), stimulating research. What economic status for the work of art: consumer durable good and financial asset? According to Bruno Frey (1997), three phases of research were undertaken: i. The first is initiated by Anderson (1974) and Stein (1977). The article titled Unnatural Value: Art Investment as Floating Crap Game written by William Baumol (1986) covers an indispensable reference that defines the issues and proposes an initial analysis. The work of Frey and Pommerehne (1989a and 1989b), discussing the analysis of Baumol by using an alternative statistical approach of the studied period, initiated a second phase which continued until mid-1990. The studies of Buelens and Ginsburgh (1993) and Chanel et al (1993), were published in the same technical approach but statistically more developed and these works are reviewing the profitability of investments in art in general, the conclusions of Baumol in particular and leading the way to an understanding of the price of a work of arts determinants. From the mid-1990s, the third phase of research, study of the art market in general seems to be neglected in favor of more focused research. A lot of published works are focused either on market segments (wine, sculpture, jewelry, Italian painting, the old furniture etc.) or on a particular artist (Picasso, by Pesando and Shum for prints (1996), by Czujack for paintings (1996)), or finally on the profitability of collections (Landes, 2000).

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Over a time, methods and research techniques have grown to accompany the evolution of scientific aims. Three methodological contributions stand out: i. If, in a first phase, the realized studies were only interested in the comparative evolutions of art prices with financial assets, economists have then supplemented this research with that of the factors explaining the evolution of prices. It is the use of a more powerful statistic tool, the hedonic regression, which allowed taking greater advantage of the information in the data. It became possible to go beyond calculations of price indices, only results that allowed obtaining the so-called "repeat sales" previously used. ii. In the early studies that focused on the art market in general, and more precisely on painting, without trying to make distinction between styles and artists, have replaced more studies taking into account the constraints specific to the operation of the segmented Art Market.

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The study of a long period, more than three centuries for the studies (from Anderson (1974) to Frey et al (1989a and 1989b)) using as raw material the database of Reitlinger (1961, 16 000 transactions collected between 1650 and 1960), was gradually abandoned in favor of shorter periods of observation most likely to realize the cyclical market fluctuations. Three questions will be addressed in this research. The objectives pursued, methods and results of econometric studies will be presented first (Section 1). Then, the critics concerning both the results and methods will be formulated (Section 2). Finally, the price movements of the section often neglected in the art market, which is the antique furniture, will be considered (Section 3).

1: Summary of studies examining the profitability of investments in art. 1.1. The objectives The objectives are to study the profitability of investments in art and to determine the level of correlation between the art market and financial markets. The measure of the profitability of investments in art needs the construction of annual indices of art. The index series obtained over a period of study can then be compared with the index series of financial markets. The approach is to apply the theory of Capital Asset Pricing Model (CAPM) to the works of art which is considered as "art asset". According to this theoretical scheme, the art market in order to be considered as an attractive investment must, firstly, offer a minimum return greater than the risk-free and, secondly, not to present a strong correlation with financial markets. If these two requirements are met, investments in art can be considered as effective tools for portfolio diversification heritage. 1.2. The methods used The study of the profitability of artistic means needs to overcome a difficulty and to realize a specificity. The difficulty is that the work of art is unique. Conversely, the shares of a company are issued in large numbers. How to compare price trends of works with heterogeneous characteristics? Moreover, the measure of the profitability of investments in art is specific. Unlike traditional investments where profitability calculations are based on a combination of intermediate income stream and possible capital gain on resale, any investment returns in art are only based on the latter. The study of the evolution of prices and the construction of indices of art involve a choice between the repeat sales method and the hedonic approach. The repeat sales method is to construct a price index by retaining only the works of art which had at least two transactions over the studied period. The method of hedonic regression, which is inspired by the approach advocated by Lancaster (1979) as well as a basket of characteristics, is suitable for studying the qualities of goods which are experiencing changes in time and / or in space. The price "global" is the sum of good prices "implied", although this term is not the most appropriate (Ginsburgh et al, 2006) of each of its features. Technically, the price is expressed in terms of explanatory variables by linear regression of n quantitative and qualitative variables. The practice of hedonic regression on prices can vary greatly, over time or between two goods, imposed to convert prices into logarithmic values. The advantages and disadvantages of each method were analyzed by Ginsburgh, Mei and Moses (2006). Both methods do not meet the same objectives and have limitations. i. The repeat sales method requires knowing the price of a single good sold at least two separate times. If all the characteristics of the property remain stable, this method allows studying a market excessing the heterogeneity of artistic goods making comparisons difficult and even impossible. This method is frequently used for studies of evolution of prices in housing markets. Many economists chose this method in their studies of art market. Anderson (1974), Baumol (1986), Goetzmann (1990, 1993, 1996), Goetzmann and Spiegel

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(2003), Locatelli, and Biey Zanola (1999), Mei and Moses (2002a, 2002b), Pesando (1993), and Pesando and Shum (1996, 1999). The method of hedonic regression can perform a r egression of works price by its various characteristics (artist name, dimensions of the work, point of sale etc...). Residues ( i, t) are considered to be free characteristics, that is to say, the characteristics that have not been included in the regression. Frey and Pommerehne (1989a, 1989b), Buelens and Ginsburgh (1993), and Chanel et al (1993) in particular, have used this method in their studies.

According to the methods, the number of processed data is very different. The repeat sales method limits severely the amount of data that can be collected and meets difficulties in data reliability. Measurement errors are always possible: "Many paintings can have the same title, size, author, painting date, and medium, yet are different goal paintings " (Ashenfelter, 2003). Thus, the study of Baumol (1986) is based on only 640 transactions over a period between 1652 and 1961, or an average of 2.1 transactions per year. Can we therefore speak of representation? Transaction volumes in auctions are much higher: the annual number of arrays passed at auction is estimated between 5,000 and 6,000 per year from 1800 to 1970 (Baumol's study covers the period from 1652 to 1961). Since 1970, the average was 50 000 (Goetzmann, 1993). One can imagine that she has not decreased. Although different, which one of these methods is more accurate? Chanel, Gerard-Varet and Ginsburgh (1996) conducted a comparative study of results produced by both methods. They conclude that the results are close. On the other hand, the predictive power of hedonic model seems more accurate. But this quality is mitigated by the risk of trying to estimate the price of a work whose essential features were not incorporated into the model. 1.2. The conflicting results and some points of convergence 1.3.1. The measured returns on investments in art The pioneering studies from Anderson (1974) to Baumol (1986), to which the studies conducted by Frey and Pommerehne (1989a and 1989b) can be added, conclude the low profitability of investments in art, well below those offered in the markets shares, or even lower than the risk-free asset (Baumol, 1986, Frey et al, 1989a and 1989b). The results are shown in the table below.

Table 1.1: Compared measures of profitability of the art market and financial markets (risk-free investments)
Real rate of return (%) Art Market Financial Markets 2,6% 3,0% 0,55% 2,5% 1,4% 3,3% 1,7% 2,4%

Authors Anderson (1974)

Samples Painting in general

Periods studied 1780 1960 1780 - 1970 1652 - 1961 1635 1949 1950 - 1987

Baumol (1986) Painting in general Frey et Pommerehne (1989) Painting in general

NB: The data used has two sources: the catalog Reitlinger (1961 and 1971, 16,000 transactions recorded in the period 1650 to 1960) and Mayer Directory (published annually since 1963, it lists all the auctions conducted in the world during the previous year)

The conclusions of Baumol are, more or less, taken over by Frey and Pommerehne. Baumol concludes to a low profitability of investments in art, attributing it in part to the fickleness of taste over time and therefore their unpredictable nature. His conclusion is both creative and pragmatic: it is logical that the profitability of the art (0.55%) is in the long term equilibrium, lower than the risk-free

(2.50%) The difference (1.95%) allows a default assessment of what he calls the "psychological cost". If works of art procured the same return as the risk-free investments, all investors do not they turn away from these to the benefit of the first? In 1993, four new studies are published, Buelens and Ginsburgh, Chanel, Gerard-Varet and Ginsburgh, Goetzmann, and finally, Pesando with a significant change of method. The study by Pesando prints on modern attempts to circumvent the difficulty of the uniqueness of fine art by building a database of "multiple". The results show low profitability of investments in prints (with a slight difference between Picasso and the other the benefit first) relatively risk-free investments. Goetzmann's work leads to a similar conclusion on the profitability artistic (2% per year over the period 1714-1986). The article Buelens and Ginsburgh (1993), however, marks a turning point in the approach to the study of the art market and price evolutions. The two researchers take as its starting point the data used by Baumol while formulating a new hypothesis: the instability of taste on the very long period does not contradict the existence of stability over periods of time long enough that art can still be considered an investment. "The Fact That in the very long run (300 years), rates of return are small Does not Preclude existence of 20 to 40 year long time intervals DURING Which painting schools Achieve Specific rates of return are much Which Higher Than the rate computed by Baumol ; Steady Tastes change, so may Be That There Opportunities to Invest in Art "(Ibid). Buelens et al. pave the way for a segmented approach of the art market, which focuses on the works presenting the art homogeneous characteristics. The results confirm the hypothesis. If the average real returns over the long term is low (0.87%), at certain period art schools and artists get results superior or even very superior. The explanation for the divergence of results is given by Buelens and Ginsburgh: "These findings show That the average rate of return computed by Baumol and covers very different submarkets subperiods; Some schools do better than Others and" Tastes "Seem To Be Stable DURING long time intervals. THEY aussi That show Baumol's low rate is Strongly Influenced by the priode 1914-1950, During Which public auctions are less Likely To Be representative of what happens on the market, as well as by the overrepresentation (50% of resales) of English painters, Who Did well Between 1700 and 1870, ran out of order fashion afterwards "(Ibid). On the same basis, the study by Chanel, Gerard-Varet and Ginsburgh (1993) has got results which confirm previous results and contradict "pioneers" work. The real rate of return is 5.0% per year over the period 1855-1969, but it drops to 0.5% between 1914 and 1949 and, on the contrary, it increases to 12% between 1950 and 1970. Without claiming to be exhaustive, it appears that art market studies have then adopted the segmented analysis by artist or art schools and by period. Furthermore, the hedonic approach seems to be more used than repeat sales method. Two studies have found rates of return to be relatively comparable with those of financial markets: Czujack (1997) and Mei and Moses (2002). The first examines the market of paintings by Picasso in the period of 1966-1994 and obtains rate of return of 8.3% per year. The rate is 4.9% for the latter; in which the database covers sales results at auction in New York between 1875 and 2000 for three different art schools (American, Impressionist and Old Masters paintings). 1.3.2. The correlation between art and financial markets Can the investments in art reduce, in the sense of Markowitz (1959), the global risk of the asset portfolio composed of various investment vehicles (financial, real estate etc.) ? There are no studies which deal with the correlation between art market and estate market. However, many economists have looked at the link that joins together the financial assets with the purchase and sale of artwork. The results on the existence of a correlation are split. Stein (1977), Goetzmann (1993) and Chanel et al (1993, 1996) believe that the art market is correlated to financial markets. On the contrary, according to measurements carried out in their studies by Pesando (1993) and Mei and Moses (2002) the correlation is absent.

Goetzmann (1993) distinguishes, on the whole period, three phases of the bullish art market and three bearish phases, the latter corresponding to periods of economic recessions in Britain and the United States. The author goes beyond the mere observation of a correlation. He argues the existence of a causal relationship: the art prices tend to follow trends in equity markets, the demand for art increasing when investor wealth increases. Chanel et al (1993, 1996) shares this point of view. "Fluctuations in the exchange above those of art: the stock market is on the art market, it reacts with a delay of about one year." Conversely, the correlation coefficients calculated by Pesando (1993) show a near absence of correlation in the period from 1977 to 1992 between the market of modern prints and financial markets. The measurements obtained by Mei and Moses (2002) corroborate these findings. The correlation coefficients are 0.04 with the market share (Standard & Poor's 500 Index) and -0.03 with that of Treasury Bills over the period 1875-2000. Both economists believe that art can thus be considered as an investment, in the sense that average profitability is comparable to that of financial markets and the art market is not correlated with them. Their conclusion is indisputable as part of their subject of analysis, but we can ask the question of representativeness of a study involving only three main segments of the art market (see above), on a period which, in terms of both the history of art that the art market (1875-2000) is, except the times of war, relatively homogeneous and for the sales recorded almost exclusively in New York Christie's and Sotheby's. The works of Buelens et al (1993) provide the valuable insights to this question: the evolutions are cyclical, linked to the period of time and to an artistic school in particular. 1.3.3. The convergent results All studies conducted since the mid-1970s can reach similar conclusions: i. Whether or not comparable with the risk-free, even in the equity markets, the rates of return of the art market are higher than inflation (Ashenfelter and Graddy, 2003). The artwork is a durable good that can be assimilated to this aspect of heritage value. Investments in art are always more risky than traditional investments. The standard deviation of the average profitability is high (Baumol, 1986), still higher than other forms of investments (Mei and Moses, 2002). In the finding of a Gaussian flattened curve the art investments dominate over alternative investments for which this curve is, generally, more narrow. In other words, the investors chances to have a purchase that can give him profitability close to the average returns are low. He must be aware that the real profitability may be significantly lower or significantly higher than the calculated average. Study results are very dependent on the periods and art schools studied. (Ashenfelter et al, 2003). All studies make only a partial assessment of the profitability offered by the possession of works of art. Evaluations are interested in financial return but neglect what Baumol calls "psychological cost" and Ashenfelter et al. "intangible dividends," that is to say profits from possession, contemplation and of course the social prestige generated. Quantitative evaluation of psychological profitability by Baumol incites us to believe that it is a motivation as important as the financial motivations and even more important probably.

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2: Can art be considered as an investment? Criticism of methods used and new approaches proposed.

2.1. Methodological criticisms

2.1.1. Construct an index from unique goods i. ii. The works of art are unique goods. It is therefore paradoxical to try to construct an index that would consist of goods with heterogeneous characteristics (Ashenfelter, 2003). The quality of the works available on the market is constantly changing. However, in periods of high market growth, a part of this growth is fueled by the fact that the best works come to market. Therefore the price growth mainly reflects a change of medium quality (Ibid). To circumvent the uniqueness of artistic goods, some authors use the repeat sales method. But both properties may have similar characteristics without whether the same work. Several elements contribute to strengthening the case for the unique work: it is mainly the technique of production, the phenomenon of variants from a basic model, the preservation status and course of the time action. The price will reflect the changes made in some of its characteristics.

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2.1.2. Statistic aspects of artworks measures of profitability. 2.1.2.1. Representativeness of the information used The measure covers the only information available, retail prices, i.e., those made in auctions. The specific origin of data causes several biases: i. The market auctions are only a minority share of the art market: from 33 to 50% internationally (Ginsburgh et al, 2006), about 30% for the French market (Christmas, 2009; Ministry French Culture and Communication, 2009). What about sales gallery owners, antique dealers, artists? There is no indication that the public part of the transactions is representative of the whole. On the contrary, the auctions are a suitable place for exchanging the classified art (Moulin, [1992] 1997). For Ashenfelter and Graddy (2003), the auctions eliminate the upper and lower parts of the market, that is to say, works which have disappeared from the market because they were acquired by museums (high-end works) or which have totally lost their value and are not presented at all (low-end works). Guerzoni (1995) showed that the repertoire of Reitlinger (1961, 1971) used in numerous studies, including that of Baumol (1986), has shortcomings. The chain of successive owners of the same work is often broken and so the names of merchants disappear. This category of owners, however, is the one that makes a profit on resale.

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2.1.2.2. Transaction costs are not taking into account Costs associated with transaction of the works of art are high but cannot be taken into account (Ashenfelter, 2003, p 12). Transaction costs associated with buying and selling through auction houses vary across firms, vendors and circumstances of the sale. This is true both for sellers fees, which are negotiable, as for the fees of buyers. By the sell side, Singer and Lynch (1997) show that inequalities between sellers have a direct impact on transaction costs incurred. Wealthy collectors who own the works of high quality and who want to resale it with the help of auction houses (Christie's and Sotheby's in their model) can negotiate for reduced sales charges and they therefore face transaction costs on average lower than other categories of sellers, whose works are of lesser quality (average quality low). But this conclusion may be tempered by the fact that owners of the works of good quality must bear higher costs than others, especially the cost of security and / or insurance. As for buyers, even if commissions for the auction house seem to converge currently around 20 to 25%, additional fees (taxes etc.) vary widely. When asked about the calculation of taxes added to the hammer price, the accounting departments of Christie's in New York and Sotheby's London highlight the great variability of situations (NOEL, Interview, 2009).

2.1.2.3. Art market segmentation Market segmentation of art prevents his overall measure. Segmentation criteria relate to art schools and levels of quality of works (high, medium, low). To have an idea, it is enough to count the number of expertise areas that exist (drouot.com website lists just under 80 specialties of sales), that houses of auctions broke down by departments (nearly 100 at Christie's). The question concerning the porosity of the markets arises: are there any players in several markets? The links between markets, provided by buyers and decorators especially, may exist but the functioning of the art market is more like the "juxtaposition of several segmented markets" (Dupuis and Rouet, 1986) 2.1.2.4. The hypothesis of a financial profitability target is contestable Measuring profitability consists in making the implicit assumption that sales goal is to get a financial return. This assumption is not on line with the observation of real motivations of the sellers. A house of auctions such as Sotheby's founded its resources on four main sources; it denotes by the letters "four Ds": Death, Divorce, Discretion and Debts. Sotheby's puts the financial motivations behind the third "D", that of Discretion, reflecting a change in tastes or orientation of the collections, a change of decoration or the existence of a "Strong Market", i.g. a market that is experiencing a situation of high prices. These circumstances may prompt owners to get rid of some parts in some way, "taking their benefit" (Schmitt, 2008). The financial incentives are a minority, comparing with "life accidents". This fact partly explains the lack of "Law of One Price" (Ashenfelter et al, 2003). Even in a segmented market and narrow as the art market, significant price disparities may arise of when and where the work is for sale. At last, even if the research hypothesis of financial profitability is maintained, we may wonder about the odd choice of Baumol which excludes sales of less than 20 years. Indeed, if a buyer is motivated by profit, we can assume he will be careful to manage his own artistic portfolio, as he does with other forms of investments. Trade off between buying and selling would come from the same person. However, eliminating transactions spaced less than 20 years, Baumol precisely evicts a large part of this category of buyers. 2.1.3. Limited liquidity of the works of art The third expected quality of an investment, which indicates the ease and speed with which the assets can be converted into cash, is not considered by the study of art as investment. Obviously, the artworks are low liquid and transactions require time (and cost) for preparing long enough. The quality of works also affects liquidity. The works of high artistic quality are always attractive to the market, but it is different for the works of more uncertain or average quality which are more cyclically sensitive.

2.2. New approaches proposed 2.2.1. Art as diversification in investment portfolio? The work of Singer and Lynch (1997), Mei and Moses (2002), suggests that the interest that art represent as investment diversification. However, what kind of artistic production is concerned? Actually, a fringe minority of the market, that is to say works of art whose quality is definitely a consensus. It means, works relatively old, at least several decades, so that the views of the market (high prices) and museums (exhibitions) converge. Works that are not recognized and those yet to recognize, the unstable market of contemporary art in particular, cannot claim to be regarded as safe

and liquid securities. It was thus demonstrated that prices can be disconnected from the fundamental artistic value (Moureau, 2000). The difficulty remains unresolved to be interested in the work, and therefore art, primarily to evaluate its quality. Deducted quality from the price limits the possibilities of capital gains and carries a risk of error. This last remark refers to the role of contemporary art collectors (see below). 2.2.2. Time influences: changes in taste or drying markets? Institutions, museums and foundations, drain the high quality works (Moulin [1992] 1997, Ashenfelter 2003). The market no longer offers paintings of Renaissance masters. The supply of important paintings of Impressionism is infinitesimal. The time thus exerts a nonlinear influence on the art market. It helps develop the quality but also off the market. This action was initiated from the late eighteenth century with the establishment of museums, has accelerated during the twentieth century with the creation of many modern art museums. And the establishment of collection can be done directly, through purchases, or indirectly, by receiving donations. For collectors, allow their collection for posterity is a constant concern. An auction is a solution, creating a foundation or donations to museums are another (Interview with the collector Gilles Fuchs, in Nol, 2009). We formulate a hypothesis: the high quality works at auction often spend less than others and, anyway, they are not intended to pass and repass to episodes more or less distant. Why? Because when they come to be produced, their place is not for auction, a specific market where the existence of a relatively stable demand is requested to avoid unsold risk. And when recognized, a single pass in auction is sufficient for high quality to join a public collection or a large private collection, which may become public one day. Finally, between the primary market and sales-profile auction market, a filtering quality works is operated by the galleries of the trading market for their clients. If resales take place at auction, purchasing is done for many in galleries (Fuchs interview, in Nol, 2009), which supports the thesis of the unique appearance of quality works. There is therefore a biais to study the profitability of works of art from the repeat sales method in that tendencies for high-quality works often less proposed than the average ones, which, "try" their luck regularly on the market. The repeat sales method probably underestimates the rentability of quality works. Buelens and Ginsburgh (1993) study shows that the rise in prices of works of art is not homogeneous in time. During certain periods of time, they estimate that 20 or 40 years, the rate of price growth of an art school can "beat the market." Baumol (1986) outlines this conclusion by finding that the volatility of returns is higher on short periods. The market for an artist or an art school can turn off default supply, leaving nothing on the market that average quality works by leading artists or the works of artists 'followers'. The decline in quality will reduce buyer interest and lead them to turn to other art schools. 2.2.3. The profitability of collections Another approach to the profitability of art is to examine the profitability of collections. Again, buyer and seller are one and the same person, limiting the breaks in the chain of owners. Studying the sale of Ganz collection in 1997, William Landes (2000) observed real rates of return between 12% and 21% per year, much higher performance with results far better from other studies. In addition, owners of quality works may get auction fees lower, or zero in the case of collections (Singer and Lynch, 1997). Several factors explain the success of sales of collection. The collection is overall a guarantee of quality. "Collecting means making selection. The collection is an accumulation of selection "(Fuchs, Interview, in Nol, 2009). The passionate collector also accumulates knowledge, by his reading, his encounters, confrontation with the works. What emerges is a requirement of growing, high acuity to discern quality and a perpetual quest of hinge works or the most accomplished works, which border on the expertise and conservation museum. However, this reality is often obscured by a fog or generated media around the owner's name, especially if it is a public figure. Another factor of

attractiveness, a collection of the works have left the market long enough to become attractive since opportunities to acquire them are few.

3: Econometric studies specific to antique furniture: assessment and new study from the Art Deco furniture market The antique furniture collection is an interesting field of study in this investment approach. Separation between fine and decorative arts (or arts major vs. minor arts) no longer seems accurate, both to the most prestigious museums which devotes much space and to the market where records are stored. At last, a furniture also has a first value : its use. Economic studies that deal with antique furniture are much fewer than those devoted to markets of painting. This is explained by the fact that there are no databases devoted to antiques. The researcher who wants to invest this field must first invest in a long phase of information gathering often scattered. This difficulty is compounded by the technical nature of the furniture, which makes it more difficult to identify the components of its value, as the materials used, the technique used, the quality of the drawing of certain forms such as the feet, and, last but not least the state of preservation. Few studies were identified. The first of these was conducted by a skilled person, the auctioneer Maurice Rheims, who sought to actualize the price of two famous collections sales. But the first economic study was conducted in France in 1966 by Jeannine Capronnier. She studied over the period 1860-1956 the evolution of prices of eighteenth century furnitures. A very similar market segment has subsequently been the subject of a thesis of economy supported by Henri Mah de Boislandelle (1972). Finally, closer to us, Graeser (1993) published an article where he presents the results of a study of early American furniture market. 3.1 The methods used i. Maurice Rheims seeks to put into perspective the price paid today (for him in 1959) on the market with those who had been made at two famous sales: the Gaignat sale in 1769 and the Kroemer sale in 1913. Capronnier, Mah de Boislandelle and Graeser have formed their own databases. All of them tried to form sets of decoration that are somehow the furniture necessary for a typical family home. These sets include either furniture (chair, table etc..) or categories of furniture (bedroom, dining-room etc.). Capronnier (1966) studied the styles of Louis XIV and the three styles of the eighteenth (Regency, Louis XV and Louis XVI) over the period 1860-1956. Sources of information are original: the catalogs of Drouot auction houses in Paris but also data from Carpenter and Georges Petit galleries. However, its database contains curious choices: she has chosen to eliminate excessive prices (furniture collections) and low (or ordinary furniture in poor condition). This choice leads us to believe that ultimately it is studying the furniture of average quality. Series of annual indices (1952 = 100) are compared with the evolution of the cost of living index over the period. Comparatively, Mah de Boislandelle (1972) limits its scope of investigation to furniture Louis XV and Louis XVI which he studies the evolution of the much shorter period ranging from 1956 to 1969. The number of data is very important, about 10 000 observations, but not firsthand and subject to manipulation (Avery and Colonna, 1986) because coming from journals and specialized catalogs on antiques quotation. He also eliminates the exceptional pieces "that are difficult to follow the market value over time because of their uniqueness " (Ibid). The study of Graeser, which is more recent (1993), uses a database already created, that of Ralph and Terry Kovel, with about 1000 datas. Graeser eliminates lower price ranges (furniture in poor condition or discredited) and upper (which he described as subject to the "auction fever". Its objective is to compare over the period 1967-1986 the profitability of antique furniture with that of Treasury Bills to 90 days.

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3.2. The results i. Maurice Rheims (1959) obtained very different results between the two sales which he updates the prices. Regarding the sale of Gaignat in 1769, he recorded an increase in price by 5.2 in constant currency (1959 French Franc). While for the sale of Kroemer in 1913, the same approach leads to a decrease of 70%. Some furniture still see their prices increase but the rises are limited (less than 50% increase in 46 years on average). Capronnier (1966) distinguishes two periods. From 1860 to 1913, the two index series furniture and living costs are remarkably stable and evolve in parallel. From 1914 to 1956, they significantly increase but for the cost of living more than for the furniture, which on average become relatively cheaper. By bringing together two sets of indexes to a single series that gives the real price index for furniture, Capronnier gives a curve with erratic changes but which tends to decrease during the period. Her conclusion is that antiques as refuge value seems to be true in inflation period but not on long term. This result is actually not surprising given the fact that she studies the average range of goods. Mah de Boislandelle (1972) concludes that changes in the price of antique furnitures has been approximately the same as retail prices from 1956 to 1961. From 1961, trend in 1 furniture prices has become stronger than the price index of INSEE , what the author interprets as a stronger emphasis on the craze for antique furniture. Graeser (1993) obtains a nominal rate of return of 6.97% over the period 1967-1986, compared with that of 7.31% of Treasury Bills. The antique furniture therefore offer a lower return than the risk-free bonds. Nevertheless, Graeser nuance his remarks by noting that over the period 1967-1976, investments in antique furniture (8.24%) were significantly more profitable than those of Treasury bills (5.66%). He finally finds a strong dispersion of returns for different categories of furniture and over time. The author concludes on the low profitability of investment in American antique furniture, and as Baumol (1986), indicates that the main profitability is not monetary.

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These studies are relatively simple in terms of statistical analysis. Except for Graeser works (1993), the authors have pursued a fairly modest goal: to compare the evolution of prices of antiques with the changing cost of living. No study seeks to determine the factors explaining market prices. All studies are based on a curious choice of removing the artwork so that only the average quality furniture. This choice is a important limitation to their results. Graeser highlights the very heterogeneous nature of the furniture, Antiques heterogeneity, as () individual physical characteristics (requiring personal inspection) causes substantial and unpredictable variations in price . This finding confirms the analysis of McCain (in Hendon, 1980) a simple separation between properties and property complexes. The existence of second causes of asymmetric information and justifies the role of expertise. 3.3. New study: changes in growth rates compared to market prices for Art Deco and stock indices 3.3.1. Method The study proposes a multidisciplinary analysis of the quality and combines quantitative and qualitative analysis, through interviews with key market players studied. The Art Deco furniture market created in the 1910s and 1920s. This segment was chosen for its characteristics: i. ii. iii.
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Originality and complexity of the furniture from the paint (condition, "multiple") Information available in abundance, although difficult collection and data cleaning result A market that can be studied from birth in the 1910s.

French Institute of Statistics, a public institution

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iv.

An international market but whose center of gravity seems to be France

The database was constructed from information collected in the catalogs of auctions. An almost exhaustive consultation of catalogs of auctions could be conducted through the archival catalogs on some centers. The first traces of Art Deco furniture sales occurring in the late 1950s, the database lists of furniture offered at auction between 1959 and 2004 for France and, from 1992 to London and New York. To form a homogeneous database, were not considered underrepresented furniture (eg beds) or created by artists too rare (eg, Rose Adler) or atypical for style (eg Armand Albert Rateau). Naturally, the most popular accomplishments, chairs or office, and most-wanted artists, Emile Jacques Ruhlmann and Pierre Chareau are relatively overrepresented in the total workforce. Finally and after eliminating inconsistent or incomplete data, the database contains 2894 results from auctions, prices and complete descriptions of works, divided into 25 categories of artists (22 artists and three other categories: "anonymous", "assigned to ... "and" in the style of ... "). At this stage, the study has a limitation, the inability to obtain prices from galleries, and provides a first result, the identified absence of Art Deco furniture at auction before 1959. 3.3.2. Results It is possible to compare price changes of Art Deco furniture with the evolution of a stock index . Four indices were constructed. Regarding the art market, a price index annual average and a median annual price index. Given the dispersion of results of auctions, the median is a better indicator than the average to analyze trends. Regarding financial markets, the Dow Jones and Standard & Poor's 500 indexes, were selected to represent financial markets evolutions. Compared changes began in 1968, from which the auctions of Art Deco furniture become regular. The indices are calculated in real terms, that is to say excluding inflation. Chart I shows that the curve of the annual growth rate of median prices for furniture has experienced over the period 1968-2004, more changes than financial indices.
2

Figure 1: Compared evolutions to financial market indices and Art Deco furniture market indices between 1968 and 2004 (excluding inflation, base 100 in 1968)

The data used to compile the chart below are available in appendix

11

14000 12000 10000 8000 6000 4000 2000 0

(indices hors inflation, base 100 en 1968)

19 68

19 70

19 72

19 74

19 76

19 78

19 80

19 82

19 84

19 86

19 88

19 90

19 92

19 94

19 96

19 98

20 00

20 02

(Annes)

Indice Dow Jones Indice S&P 500

Indice de l'art (prix moyen rel par objet) Indice de l'art (prix mdian rel par objet)

The behavior of a small number of agents can, by themselves, influence the market as a whole. The three highest increases in growth rate from 1972, 1989 and 1999 are due to important collections sales, Doucet for the first time, Lesieutre for the second and Hebey for the last. The crisis of the 1990s did not really affect the price level, except for 1992, since the median price remained stable from 1989 to 1998. However, the economic crises of 1973, 1990 and 2000 decreased the median prices. If one is interested in comparative returns of financial markets and the art market, the market for Art Deco furniture shows higher performance than financial markets (see Table 2). Table 2: Average of real annual growth rate and standard deviation of financial and art indices over the period 1968-2004
Dow Jones Index Average of annual growth rates (in real terms and %) Standard deviation (Index, 1968 as 100 base) 6,7% S & P 500 Index 6,9% Mean Index of Art Deco furniture 8,2% Average Index of Art Deco furniture 11,1%

376

422

1423

20 04

3475

The average of annual growth rate (excluding inflation) of art median index is 8.2%, slightly higher than the Dow Jones (6.7%) and S & P 500 (6.9%). This result confirm on anther specific art market analysis conducted by Buelens and Ginsburgh (1993). However, the standard deviations calculated for each index indicate a greater dispersion the art market, joining the findings made by Baumol (1986) and Mei et al (2002) in particular. The index of the median price of art Deco furniture is three times more important than two financial indices. Again,

12

it is clear that the art market is a market far more risky than the financial markets. This result limits the scope of the rate of return got here, even if they are relatively high. One can question the constitution of investment funds in art, especially if they do not allow to purchasers to make social or psychological benefits of their works of art.

Conclusion The art market analysis request an approach in terms of cycles of artistic schools (Buelens and Ginsburgh, 1993) rather than general trend that transcends schools and periods (Baumol, 1986). The trend, by aggregating the fluctuations, rising or falling periods, erases the amplitude of variations. These variations are influenced by life cycles in the market for art schools. The estimated duration of growth phases ranges between 20 and 40 years (Buelens et al, 1993). There are two possible explanations for an art market punctuated more by cyclical changes in each school of art than by general economic conditions, although the correlation has also been demonstrated: the fragmentation of the market in as many segments as are specialties and the presence of agents, museums, drying out the offer of quality works. The role of time as described above leads us to question the explanation put forward by Baumol (1986) of changing tastes and their unpredictability. A specific market may disappear as a fashion but the most likely explanation is that the market goes out because of the lack of quality works available yet. It causes a diversion of demand to other schools or, within the same school, to other media. The relevant time horizon of a profitability analysis of art is the one who would consider an art school, from its born on the primary market to its death (disappearance from the market), either because the art was celebrated or ignored. The market for Art Deco style is exemplary in this respect. Celebrated since its birth officially given in 1925, its eclipse in the late 1930s was due to economic and policic events, not to changing tastes. Rediscovered in the late 1960s and especially in the early 1970s, its popularity has continued to assert itself, shared by private collectors and museum directors. In recent years, the supply is scarce, as reflected in the price peaks reached. Artists whose achievements are of lower quality, as the house Dominique (Camard, Interview in Nol, 2009), begin to appear, which is a worry for the market in the future (Brunhammer, Interview in Nol, 2009). Perspectives for new researches How to conciliate the existence of a proven correlation between art and financial markets with the observation of record prices achieved during crisis periods? A hypothesis can be advanced, opening new research perspectives: art markets demand is not homogeneous. Demand for works of high quality is not elastic. It comes from wealthy collectors and museums or foundations and are less sensitive to cyclical changes than the "new buyers" as defined in Moulin (2003). Therefore, it would mean that each art market has two categories of demand: a fixed demand, structurally permanent, and a floating demand, whose ebb and flow movements are related to changes in the economy and financial markets. When economic conditions are not favorable, the first demand predominantly occurs. Conversely, in financial expansive phase, fixed and floating applications combine, explaining the rise in prices and up to levels that sometimes market actors find themselves surprising (Brunhammer, Interview in Nol, 2009).

13

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Appendix 1. Compared evolutions of financial and Art Deco furniture markets indices over the period 1968-2004 (1968 as 100 base, excluding inflation)

Years

Dow Jones

Dow Jones Index 100 80 84 90 105 85 59 83 101 83 79 80 90 84 104 129 123 158 197 198 221 278 265 322 339 386 396 527 664 819 958 1192 1106 1033 870 1083 1113 6,9%

S&P 500

S&P 500 Index

Average Average Mean Mean price price of price index price of index (Art Art Deco (Art Deco Art Deco Deco furniture furniture) furniture furniture) 652 4354 4873 3098 20840 383 6969 2548 5165 3628 10835 12451 14291 7844 5860 7072 14732 19778 9785 9517 7812 51248 23175 17385 12015 28398 21009 36118 20910 24389 24399 86014 84541 77856 48948 48105 31737 100 667 747 475 3195 59 1068 391 792 556 1661 1909 2191 1203 898 1084 2259 3032 1500 1459 1198 7857 3553 2665 1842 4354 3221 5537 3206 3739 3741 13187 12961 11936 7504 7375 4866 11,4% 652 4354 4598 1980 11885 383 1056 1004 2209 1281 7677 2242 5422 1836 1161 1162 3367 7953 3587 3863 2752 10388 10732 10304 4488 10693 10722 14855 11723 12880 12037 41522 29725 28478 13053 25525 12000 100 667 705 303 1822 59 162 154 339 196 1177 344 831 282 178 178 516 1219 550 592 422 1593 1645 1580 688 1639 1644 2277 1797 1975 1845 6366 4557 4366 2001 3913 1840 8,4%

1968 905 1969 759 1970 793 1971 853 1972 988 1973 801 1974 555 1975 781 1976 950 1977 780 1978 748 1979 754 1980 849 1981 793 1982 986 1983 1219 1984 1162 1985 1494 1986 1860 1987 1870 1988 2084 1989 2626 1990 2499 1991 3040 1992 3204 1993 3646 1994 3737 1995 4977 1996 6265 1997 7727 1998 9041 1999 11251 2000 10434 2001 9746 2002 8211 2003 10222 2004 10502 Taux de rentabilit annuel moyen Ecart-type de l'indice sur la priode

100 87 87 98 114 92 62 83 102 89 89 97 120 111 132 160 160 204 238 238 267 337 313 400 423 453 448 599 720 948 1210 1438 1277 1116 866 1087 1180

100 88 87 98 115 92 62 83 102 90 90 97 120 111 133 160 161 205 239 239 268 338 315 402 425 455 449 601 722 952 1215 1443 1282 1121 869 1092 1185 7,1%

376

422

3475

1423

19

APPENDIX 2 : Interviews made with market key actors

Interview 1 : Cheska VALLOIS, Vallois Gallery, Paris and New York

Interview 2 : Jean-Marcel CAMARD, Expert and Chief Executiv Officer of Camard & Associs SVV, Auction house, Paris

Interview 3 : Yvonne BRUNHAMMER, Curator, Museum of decorative arts, Paris

Interview 4 : David NORDMANN, Auctioneer, ADER SVV, Auction house, Paris

Interview 5 : Ccile VERDIER, Director of the XX decorative arts Department, Sothebys, Paris

th

Interview 6 : Gilles FUCHS, Collector

20