Speculative Trading and Bubbles: Evidence from the Art Market

We argue that extrapolative expectations drive boom–bust cycles in the postwar art market. Price run-ups coincide with increases in demand fundamentals but are followed by predictable busts. Predictable changes account for about half of the variance of five-year price changes. High prices coincide w...

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Bibliographic Details
Published in:Management science 2022-07, Vol.68 (7), p.4939-4963
Main Authors: Pénasse, Julien, Renneboog, Luc
Format: Article
Language:English
Subjects:
art auction
Art markets
extrapolative beliefs
Prices
Short term
Speculation
speculative bubbles
Trading
trading volume
Transactions
Volatility
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Summary:We argue that extrapolative expectations drive boom–bust cycles in the postwar art market. Price run-ups coincide with increases in demand fundamentals but are followed by predictable busts. Predictable changes account for about half of the variance of five-year price changes. High prices coincide with many attributes of speculative bubbles: trading volume, the share of short-term trades, the share of postwar art, and volatility are all higher during booms. In addition, short-term transactions underperform long-term transactions. Survey evidence further confirms the link between beliefs, prices, and volume dynamics as in models in which extrapolative beliefs fuel speculative bubbles. This paper was accepted by Tyler Shumway, finance.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2021.4088