Trade In Art

Historic Background

In 1969, the German Economist Willie Bondgard, developed a “Price to Recognition” Index for the Art Market (KurstKompass). This Index commonly known as Bondgard Index, consisted in allocating a number of points for certain recognition events identified as significant to influence the artist price on the market. For example “X” number of points were allocated if works by the artists are presented on Top Museums, a lower number of points “Y” is allocated if the museums was less important, or “Z” points if it was addressed on specialized publications (Art Magazines, Books, Journals), and then the total number of recognition points obtained by the artist were added.

In addition, we have to obtain the market price of a representative work by the artist and this has to be divided by the total number of points to obtain a “Price-Recognition” ratio. The lower the “Price-Recognition” ratio could be interpreted as the price of the artist work being undervalued, and thus presenting a higher probability of price increase in the short/medium term

Economics Applied to the Art Market

An econometric study performed by William Grampp, found a high correlation between KurstKompass and the actual price increases in the market.

The “Price-Recognition” relationship becomes more attractive if we consider the premise introduced by De Ugarte in his book Microeconomics of Art & Paintings (Microeconomía del Arte y la Pintura)”, regarding the potential to influence prices on the market. “We could accept the view that art works with a established prestige offer a level of security for investment, buyers consider the prices will nor depreciate easily, and the demand curve becomes more inelastic to recognition. Conversely, for the lower tranches of the “price-recognition” curve, where the main driver is demand (as opposed to prestige), the curve is more elastic, and thus the impact over the artist prices of being recognized by an Art Museum (publication or critics), can significantly increase the average price of the works”,

The main conclusion is that for the lower tranches of the “Price-Recognition” curve (when the work is considered undervalued regarding the recognition level associated with the artist), there is higher potential to influence in the market price, by fostering the number of appreciation events surrounding the artist (i.e. expositions, publications, advertisement). These works provide a higher likelihood of price increase and thus return over the investment in the short and medium term.

Application to the Mexican Art Market

According to the analysis of the domestic Mexican Art Market by Peraza & Iturbe “the market has established its own rules and always will privilege with a higher price those art works which have been studied or published in books, magazines, gallery catalogues, etc., the more an art work (or artist) has been analyzed and written upon, is more secure for the buyer derived from the higher social prestige.”

Knowledge and Experience at your Service

Trade In Art has developed an index, based on Bondgard methodology, adapted to the characteristics of the Mexican Art Market, which allows us to identify accurately and objectively, when the price of an artist work is undervalued, and thus can offer a significant return opportunity.

Constant Update and Analysis

Additionally Trade In Art performs a constant monitoring of the Art Market worldwide by following the behavior of Art Auctions and the leading Art Market (Annual All Art Index) developed by professors Jianping Mei y Michael Moses. In specific for the Mexican Art Market (both international and domestic), Trade In Art closely follows the events that influence on the prices, liquidity and tastes of the artists works recommended by our experts.

It is worth noting that the methodology used by Mei & Moses to calculate the Annual All Art Index is based on the Repeat sales Methodology. This method consists on comparing the sale price of the same art works, in different periods, which has the advantage of eliminating the “Uniqueness” Characteristics of Art Works by comparing the same asset through time.

Art Market Index

The generic formula to calculate the price index is based on the Repeat Sales methodology:

Where:
Pib is the initial sale price y Pis is the second sale price,
Cis & Cib are matrixes which take a value of 1 if a transaction on asset i was executed on period t or zero otherwise.
i = 1,2,…N is the number of assets
δ are the parameters to estimate, which could be interpreted as the price index for all N assets in period t.

For further information related to these topics the following bibliography is suggested:

Bongard, W, “Zur Frage des Geschmacks in der Rezeption bildender Kunst der Gegenwart”. (Colonia 1974), Kölner Zeitschrift für Soziologie und Sozialpsychologie 17.
De Ugarte, David, “Microeconomía del Arte y la Pintura”, (Octubre 1997), www.eumed.net
Ginsburgh, Victor; Mei, Jianping; Moses, Michael, “On the Computation of Prices Indices”, (January 2005)
Grampp, William D., “Pricing the Priceless. Art, Artists and Economics”, (1989), New York: Basic Books.
Mei, Jianping and Moses, Michael, "Art as an Investment and the Underperformance of Masterpieces" (February 2002). NYU Finance Working Paper No. 01-012. http://ssrn.com/abstract=311701.
Peraza, Miguel & Iturbe, Jose, “El Arte del Mercado en Arte”, (1998), Miguel
Angel Porrua Grupo Editorial, 2da Edición

Sagot-Duvauroux, D, “Art Prices”, (2003), in R. Towse, ed., A Handbook of Cultural Economics, Cheltenham: Edward Elgar.

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