A random walk through Mayfair: Art as a luxury good and evidence from dynamic models

• Published in: Journal of international money and finance 2019-07, Vol.95, p.112-127
• Main Authors: Pownall, Rachel A.J., Satchell, Stephen, Srivastava, Nandini
• Format: Article
• Language: English
• Subjects: Art prices; Cointegration; Granger causality; Luxury goods; Stochastic elasticities; Threshold models
• ISSN: 0261-5606; 1873-0639
• DOI: 10.1016/j.jimonfin.2019.04.001

•Evidence of art as a luxury good considering wealth elasticity in real terms.•Empirical results using an ECM finds that equity markets impact art prices.•High stock prices in past 3 years result in art prices likely to rise year after.•High sentiment leads to evidence for art prices being explosive in following year. The movement of international art prices in conjunction with other asset prices is preliminary to our understanding whether art is a luxury good. It is well known that there are linkages between art market prices and equity prices. However, less is known about the structure of dependence between these variables and the influence of gold prices and sentiment. We analyse art prices, at the outset using Granger causality and error correction models (ECM) to capture the long term dynamics between art prices, equity markets, gold prices and investor sentiment. The dataset we use is unique and covers British art prices from 1895 to the present. Initial results do not give a complete picture of price movements or a fitting description of wealth effects; to rectify this we look at short term dynamics in the art market. We assume a regime switching model to describe the movement of prices using a threshold variable that drives prices into possibly locally explosive regimes. These results indicate a dynamic wealth effect in that high (low) stock prices lead to subsequent increases (decreases) in art prices. However, this approach means that elasticities are now stochastic, and we redefine what a luxury good is. This is further explored by directly calculating elasticities from our model and its variants to analyse properties of art as a luxury good. Our threshold approach gives deeper insight into the impact of different market conditions than conventional ECM and cointegration modelling.