Julien Penasse (University of Luxembourg)

“Bubbles and Trading Frenzies: Evidence from the Art Market”

abstract

We use the art market as a laboratory to test speculative bubble models based on investor disagreement. Several aspects distinguish the art market from other markets: it features unlevered and wealthy investors, financial and technological innovations are absent, and transaction costs are substantial. We find that prices not only positively correlate with volume but also with very short-term transactions. Large volumes are followed by negative returns. Finally, short-term transactions underperform and are riskier than long-term transactions. The evidence is consistent with a resale option model of speculative trading where the impossibility to sell short embeds a bubble component in prices.