Art Auctions and Art Investment in the Golden Age of British Painting
| Published date | 01 May 2017 |
| Date | 01 May 2017 |
| DOI | http://doi.org/10.1111/sjpe.12122 |
ART AUCTIONS AND ART
INVESTMENT IN THE GOLDEN AGE
OF BRITISH PAINTING
Federico Etro* and Elena Stepanova*
ABSTRACT
We analyse the evolution of the price of paintings in London auctions with a
unique data set of over 200,000 sales in the period 1780–1840. We build a price
index for the representative painting through hedonic regressions controlling for
the characteristics of auctions and paintings and for the artists’ fixed effects.
The emergence of an efficient secondary art market was an important opportu-
nity for portfolio diversification. Estimating a CAPM model for art investment
suggests that British paintings could deliver a higher return compared to
imported paintings and an attractive source of diversification relative to the con-
temporary stock market. This contributed to increase the demand for British art
and, possibly, to promote the innovations of its Golden Age. While the represen-
tative painting of the British school was initially undervalued, new British pain-
ters reached foreign prices by the beginning of 1800s.
The Arts will always flourish in Proportion to the patronage
given them by the Rich, Joseph Banks
We examine the market for paintings in London between the end of the
1700s and the beginning of the 1800s through the analysis of art auctions of
this period.
1
The econometric analysis of a unique data set, which is larger
than any data set on historical art prices used before, allows us to investigate
art pricing in the secondary market, build an accurate hedonic price index
2
and provide some preliminary considerations on the economic determinants
of art pricing
3
and art investment.
4
Probably for the first time in art history, the development of an efficient
auction market in a vital financial centre such as London did turn art
*Ca’ Foscari University of Venice and Sant’Anna School of Advanced Studies
1
For a recent art historical review of British art in this period, see Solkin (2015).
2
For an alternative price index, see the recent work by Spaenjers et al. (2015). Related
applications of quantitative methods to the economics of art can be found in Graddy and
Pownall (2016) and Goetzmann et al. (2016).
3
While most of the work is empirical, for a recent theory of art pricing, see Itaya and
Ursprung (2016).
4
The financial analysis of investment in art was started by Stein (1977) and Baumol
(1986). See Agnello (2016) for a recent application.
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12122, Vol. 64, No. 2, May 2017
©2016 Scottish Economic Society.
191
investment into a financial opportunity. In particular, we argue that British
paintings were initially undervalued but could guarantee a higher return com-
pared to imported paintings and an attractive source of diversification relative
to the contemporary stock market. The increase in demand and price of Bri-
tish art may have played an important role in fostering the artistic innovations
of the British Golden Age.
5
Our work is related to a growing body of literature on historical art mar-
kets emphasizing the economic determinants of artistic production and inno-
vation. Since the pioneering work of Montias (1982), interdisciplinary
research in economic history and cultural economics, has been focused on the
organization of artistic markets in Italy (for instance, see Spear and Sohm,
2010; Etro and Pagani, 2012 2013; Pinchera, 2014; Etro et al., 2015; Boro-
wiecki, 2015), the Netherlands (Montias, 1996; De Marchi and Van Miegroet,
1994; Montias, 2002; Etro and Stepanova, 2016), Spain (Etro and Stepanova,
2017), England ( Cowan, 2006; Bayer and Page, 2011) and France (Etro and
Stepanova, 2015). These studies have pointed out a number of interesting styl-
ized facts and have provided descriptive statistics on the paintings traded by
painters, owned by collectors or traded in auctions between the XVII and
XIX century.
6
However, most of them are based on limited data sets with few
hundreds or, at most, few thousands of observations on art prices, which can
be hardly representative of the entire trade in art at the time.
In this work, we focus on London auctions with a unique data set from the
Getty Research Institute with over 200,000 transactions. The period under
consideration, between 1780 and 1840, became to be known as the Golden
Age of British paintings (see Vaughan, 1999, Solkin, 2015). This coincided,
not by chance, with an innovative age characterized by an unprecedented
development of the financial markets in London, a rapid accumulation of cap-
ital in the country made possible through international trade, and the develop-
ment of technological innovations at the basis of the First Industrial
Revolution.
Our data set contains all the paintings traded at any price in any available
auction house during the period. An important related work by Bayer and
Page (2011) has analysed paintings traded at extremely high prices (above 100
pounds) between 1740 and 1909, and all the paintings traded at Christie’s in
the period 1840–1885. Therefore, it is a representative sample only for a later
period, and mainly for the major auction house. Besides these substantial dif-
ferences in data sets, Bayer and Page (2011) focus on other research questions
and provide interesting evidence on the mixed social origins of sellers and
buyers active in the auctions. A result of their empirical investigation is that
British paintings were sold at prices that were significantly lower than the
5
Our considerations based on the analysis of the British market for paintings should be
seen as complementary to art historical considerations. However, prominent art historians
like Solkin (1996) have already emphasized the importance of the market environment for
the development of the British school. See also Hamilton (2014).
6
The economics of Renaissance art in Italy between the XIV century and the XVI century
is studied in Etro (2016).
192 FEDERICO ETRO AND ELENA STEPANOVA
Scottish Journal of Political Economy
©2016 Scottish Economic Society
imported paintings. Moreover, they have shown smoothed average prices
emphasizing an increasing trend in art prices during the Victorian age.
7
We
complement this work with a fully fledged econometric analysis.
We confirm that prices of British paintings remained on average well
below the prices of imported paintings, but tended to increase more over
time. We start by running hedonic regressions that emphasize the determi-
nants of art pricing and we compute through them hedonic price indeces
for all the paintings and for those of different national schools. This allows
us to obtain annual return rates for the investment in paintings in general
as well as in paintings of different national schools. In particular, we
obtain an average return rate of 4.3% for art investment, but the return
for investment in the British school is both higher (7.2%) and riskier com-
pared to investment in other schools. Applying a basic CAPM methodol-
ogy on return/risk of the stock market and the art market (see Stein, 1977,
and Agnello, 2016), we show that investment in British art was an attrac-
tive investment option also in terms of portfolio diversification, while the
aesthetic dividend from owning paintings was higher for Italian and Dutch
works compared to the British ones. While only suggestive, because of the
limited data on the stock market of the period, these results are in line
with the fact that British collectors did value foreign paintings more but
they started to invest in the undervalued British paintings to look for bet-
ter returns and diversify their investments.
This may have been a key factor driving the increasing demand for
domestic art also in the local primary market, which in turn did foster
innovative artistic activity. We support this Schumpeterian thesis by show-
ing that the faster appreciation of British paintings was largely due to the
new painters. Indeed, the prices of the new British painters entering in the
market during the 1700s did increase relatively to the others, reaching the
same levels of the imported paintings for the local artists that started their
activity at the end of the century. Painters of the British Golden Age such
as Lawrence, Reynolds, Wilkie and Turner finally reached the same prices,
as well as the same international recognition, of the best contemporary
continental masters.
The article is organized as follows. Section I describes the development of
the art market in London in detail setting the stage for the subsequent eco-
nomic analysis. Section II focuses on the auction market and describes the
data set based on auctions’ results. Section III presents the econometric analy-
sis, estimates a simple CAPM model to investigate whether investment in Bri-
tish art was attractive and provides evidence that increasing prices of the new
domestic painters were driving the higher returns of the British school. Sec-
tion IV concludes.
7
More interestingly, Bayer and Page (2011) present a repeated sale price index for the per-
iod 1840–1900 which shows a rapid increase in the price of representative paintings. Since we
focus on the earlier period 1780–1840, our work can be seen as complementary to theirs.
ART AUCTIONS AND ART INVESTMENT 193
Scottish Journal of Political Economy
©2016 Scottish Economic Society
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