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The Case For Investment Into Art And The Development Of Art Indices

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2.1 Art Index and Methodology The case for investment into art and the development of art indices has been at the forefront of the evolution of investing into alternative assets. Databases, indices, and market reports are now essential analytical tools with which art investors can assess financial performance. Over the past few decades, researchers have used different methodologies to calculate the financial returns on art investments, based on public auction records.

2.1.1 General Review There are four main methodologies for producing art price indices. Average prices, geometric means, repeat sales and hedonic regressions. The first significant study was by Stein (1977), who analyzes the financial return of auctioned paintings in USA and Britain for the period of 1946-68 by using the average prices methods. Stein considered the auctioned objects each year as a random sample of the underlying stock of art and constructs an index based on the yearly average transaction price. Baumol (1986) and Frey and Pommerehne (1989) calculate the geometric mean return on works that sold at least twice during the considered time frame. Baumol constructs a data set of transaction prices of the best-known art works from 1652 to 1961 in London by using geometric mean method. Revisiting Baumol’s study, Frey and Pommerehne enlarge the data set by extending the time period to 1987 and including auction sales from European countries. However, these two methods do not enable the construction
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