Some Dynamic Models of UK Art Market Prices and their Dependence on UK Equity Prices
Nandini Srivastava, Christ's College, University of Cambridge
12th Apr 2013 11:30 am - Room 214/215 Economics and Business Building
It is well known that there are linkages between art market prices and equity prices. However, less is known about the details of the dynamic dependence of the two variables. We analyse art prices, initially using Granger causality and error correction models (ECM) to understand the long term dynamics of price movements with respect to equity markets and investor sentiment and to identify what drives these prices. The dataset we use is new and covers British art prices from 1895 to the present; a period which, we would argue, coincides with the time when art has become an investment good. Our preliminary results do not give a complete picture of price movements or a suitable description of wealth effects; to rectify this we need to look at short term dynamics in the art market. We use a regime switching model (from Knight, Satchell and Srivastava (2012)) to describe the dynamics of prices using a threshold variable that drives the 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. This is further explored by directly calculating elasticities from our model and its variants to analyse further properties of art as a luxury good. The magnitude of these gains and falls are quite different. Generally, a threshold approach gives deeper insight into market conditions than conventional ECM and cointegration modelling.