1. Background to the research

Speculative trading and bubbles: “Evidence from the Art Market” is a study by Julien Pénasse and Luc Renneboog. Published in Management Science, one of the world’s most prestigious and influential academic journals in the fields of finance and management, this study is the fruit of 10 years of research and analysis. It examined more than a million transactions carried out in auction houses around the world since 1957. The study provides a better understanding of how the value of goods offered for sale on the art market is determined, and how this value fluctuates.

2. Taste doesn’t matter

Contrary to what one might think, buyers’ tastes do not have a significant influence on prices as a whole. “Although an artist’s influence and reputation are important factors in his or her price, they have no discernible impact on the overall market,” explains Pénasse. On the other hand, wealth, particularly that of the richest 1%, is strongly correlated with art prices as a whole.

3. The mirror effect of wealth

Traditional markets are often viewed through the prism of “efficient markets.” For example, if the S&P 500 rises, this normally reflects an expectation that the US economy will improve in the future. Applied to the art market, we would expect art prices to reflect future demand. In other words, an increase in art prices should theoretically precede an increase in the wealth of the richest 1%. On the contrary, the study shows that when the wealth of the 1% increases, prices tend to fall in the future. “The data suggests an over-reaction by buyers who seem to extrapolate the increase in wealth and inflate prices, which eventually fall. This is a phenomenon characteristic of bubbles.”

4. The phenomenon of bubbles

Bubbles are often described as phenomena in which buyers acquire assets at an already high price, in the hope of selling them quickly at an even higher price. A recent example is property flipping, which was particularly prevalent during the 2008 crisis, when many investors bought properties in the hope of making a quick profit by selling them at a higher price. This process fuelled price escalation and increased the number of transactions, until the bubble burst. “Thanks to all the data we have analysed, we are the first to have succeeded in demonstrating that the phenomenon of ‘flipping’ also exists in the art market.”

5. The consequences of supply

The increase in supply is a key variable to take into account, as it directly influences prices. “Recently, many works by hyper-contemporary artists have been bought in large quantities, which initially drove up prices. However, when these works were put back on the market, prices started to fall.” According to a study by the same team and José Scheinkman, this phenomenon can be explained by excessive speculation, where a sudden increase in supply can lead to a price correction. This shows the vulnerability of young artists who continue to produce new works, which can lead to spectacular price falls when the market becomes saturated.

This article was written in for the , published on 23 October. The content is produced exclusively for the magazine. It is published on the website as a contribution to the complete Paperjam archive. 

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