Essays on investment in the Chinese art market : a thesis presented in fulfilment of the requirements for the degree of Doctor of Philosophy in Finance at Massey University, Auckland, New Zealand

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Massey University
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The growing significance of investing in Chinese painting and calligraphy (hereinafter: Chinese art) has garnered widespread attention from scholars, investors, and collectors. This dissertation comprises three essays that delve into the Chinese art market. It first explores the price determinants and investment performance of Chinese art; second, the potential of art investment for portfolio diversification; and finally, the informational content of pre-sale estimates in terms of accuracy and uncertainty. Essay 1 examines the price determinants and investment performance of Chinese art. The study utilizes 165,847 lots sold executed by 533 Chinese artists between 2000 and 2017. Using hedonic regression, this study constructs the Chinese art price index, and finds that the artwork’s attributes, such as proof of authenticity, types of mounting, and large-scale auction months, have a significantly positive impact on prices. It also reveals two distinct art market booms in 2005 and 2011, with the latter reaching a record peak. Moreover, the average holding period for Chinese art is approximately 3 years, much shorter than the 10-year average in Western art markets. This indicates that the Chinese art market exists in speculative activity. This underscores the necessity for art market participants in China to be aware of the risk associated with art investment, as art is not necessarily for art’s sake. This study comprehensively analyses hedonic attributes’ impact on prices, offering valuable insights for constructing Chinese art-price indices and assessing respective returns. It is a key resource for those keen to deeply understand the Chinese art market. Essay 2 investigates the potential diversification benefits of investing in Chinese art based on a unique dataset of 4,840 repeat transaction pairs from 2003 to 2021. Using the repeat-sale regression, it finds a semiannual art return of 6.18%, which outperforms all other investment assets and has a lower standard deviation than equities. To assess the diversification role of Chinese art, correlation analysis, the capital asset pricing model, and downside beta are employed. The study finds that Chinese art exhibits a low or negative correlation with common financial assets and a negative market beta when the Shanghai composite stock index and Shenzhen composite stock index are used as market returns, indicating its efficacy as a diversification instrument. Additionally, Chinese art can act as a hedge against domestic stock market downturns in a diversified portfolio. Furthermore, the study adopts mean-variance portfolio optimization to assess the potential advantages of incorporating Chinese art into investment portfolios. The results show that the efficient frontier that includes Chinese art is superior to those without such an inclusion. Moreover, the inclusion of Chinese art enhances the overall utility of the portfolio across all degrees of risk aversion, as evidenced by the power utility optimization. Supplementary tests show that portfolios on the efficient frontier with Chinese art outperform the equal-weighted portfolio, and that the efficient frontier with Chinese art is superior to the efficient frontier without Chinese art during periods of underperformance in the domestic stock market. In conclusion, this study underscores the potential benefits of portfolio diversification through investing in Chinese art, thereby making a valuable contribution to the existing literature on art-related portfolio diversification strategies. Essay 3 investigates the impact of certain variables on the informational content of pre-sale estimates in terms of accuracy and uncertainty. Using a sample of 191,102 artwork executed by 533 Chinese artists from 2000 to 2021, the study reveals that factors, such as artists’ mentorship experience, the proof of authenticity, the large-scale auction months, and past-sale records, can either improve or diminish the accuracy and uncertainty of pre-sale estimates in predicting the hammer prices. This finding enriches the extant literature on the reliability of pre-sale price predictions in the art market. Moreover, it offers valuable insights for auction houses seeking to reduce prediction errors. The study further uncovers that the impact of these factors varies across price distributions, suggesting that auctioneers could utilize specific variables to enhance the accuracy of pre-sale estimates tailored to different price segments. Additionally, this study also finds that auction houses with artist-specific experience are more likely to offer precise pre-sale estimates, while they are less optimistic about reducing the uncertainty of pre-sale estimates. The study contributes to the literature on art economics by examining the extent to which auction houses can influence the outcomes of art auctions.
Art as an investment, Art, Economic aspects, Marketing, Art, Chinese