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‘Art and Money’ studies the relationship between equity markets and art
The researcher duo from Tilburg University, Luc Renneboog and Christophe Spaenjers along with William N. Goetzmann of Yale School of Management, has released a research document, entitled ‘Art and Money’. It investigates the impact, if any, of equity markets and top incomes on art prices.

Employing a long-term art market index that comprises data on repeated sales right since the 18th century, they demonstrate how equity market returns - both same-year as well as lagged - have a significant bearing on the price level in the art market. The three financial experts with a keen interest in art come from the National Bureau of Economic Research. The basic purpose of their research document is to explore the link closely.

Explaining the connection, they state: “Over a shorter time frame, we also come across empirical evidence that a rise in income inequality may well lead to higher prices for art, in line with the results of a numerical simulation analysis. Finally, the results of Johansen co-integration tests strongly indicate the existence of a long-term relation between top incomes and art prices.”

Trying to understand the whole exercise from a broader perspective, Manas Chakravarty of the leading business publication, Mint, notes in a column: “Why are art prices so volatile? (It’s) because, unlike most other assets, its supply is limited! With supply being inelastic, the art prices completely depend on the demand side of the equation.”

Emphasizing this aspect, the researches reveal: “When the buying power rises, this can be expected to result in higher art consumption, and thus to a higher level of price in the art market.” How does one test that proposition in practical terms? To prove their point, the researchers look at stock market returns as a proxy to measure the wealthy individuals’ buying power, since they are the ones who buy art.

The credentials of the researchers-authors add credibility to the comprehensive study. William Goetzmann is an expert on a vast range of investments, comprising stocks, mutual funds, real estate, hedge funds and paintings. His research topics incorporate global investing, selecting mutual fund managers, forecasting stock markets, housing as investment, as well as the risk and return of art. A former director of Denver's Museum of Western Art, his work has been featured in prestigious publications like the Wall Street Journal, Business Week, the Economist, the New York Times, Forbes, and Art and Auction.

Professor Goetzmann has a background in arts and media management. He has written and co-produced shows for ‘Nova’ and the ‘American Masters’ series. He has also co-authored the award winning books, ‘The Origins of Value’ and ‘The West of the Imagination’.

Luc Renneboog taught at Belgium’s Catholic University of Leuven and at Oxford University before joining the Tilburg University. He also served as a visiting lecturer/researcher at the Venice University, London Business School, HEC Paris, Colegio Universitario de Estudios Financieros (CUNEF, Madrid), and European University Institute (Florence).

Christophe Spaenjers, who did his M.Phil. and Ph.D. in Finance from Tilburg University is a Visiting scholar at Columbia University, London Business School, and Yale University (Fall 2010, planned). His rsearch interests include investments and their implications. He has penned several research papers, including ‘Art and money’, ‘The iconic boom in modern Russian art’, ‘Buying beauty: On prices and returns in the art market’, and ‘The Dutch grey market’.

The three together created a price index for art spanning the time period 1765-2007, taking into account prices for the British market, since the country has been the prime center of the art market for most part of the period. They then related the index to the rise or fall in equity prices. The comparative findings pointed to a strong correlation between the movements of the art market and the equity markets returns, something hardly surprising!

Curiously, the researchers also dug out evidence to show that art prices happen to go up when inequality in a country rises, though this assumption doesn’t hold true particularly for the post-World War II period in the UK. However, they do establish the positive correlation between art prices and inequality in the US during post World War II phase.

“That’s entirely understandable, as it’s in the US where the real wealth shifted after the war,” Chakravarty comments to add. “This well implies we can expect art booms whenever income inequality rises quickly. This seems exactly what we’ve been experiencing during the last period of strong art price appreciation, 2002-07. Indeed, in many nations with large numbers of art buyers, income inequality rose in those years, mainly owing to increases in managerial compensation.”

There is also a close correlation between top incomes and art prices. To sum it up, the significant study concludes that it is ‘the wealth of the wealthy’ that pushes up and drives art prices, a phenomenon closely linked to stock swings.