Correlation and Volatility in the Art Market

Quality art (i.e. blue-chip, or investment-grade) tends to hold its value over time which, combined with the art market’s relatively low correlation with the financial markets, makes it, in theory, a good inflation hedge. In fact, the art market tends to lag the wider economy.

When the economy expands, investors generally perceive art as an opportunity to park excess cash. When the economy contracts, art is considered a less attractive asset, reducing confidence and therefore the number of transactions. Investor confidence is as important to the art market as it is to the financial markets.

Contrary to popular claims, parts of the art market are actually quite volatile. Art prices are subject to manipulation and fashion-driven, particularly in the contemporary arena. Contemporary art has not yet stood the test of time, whereas the quality and importance of older works have been acknowledged over the course of generations. Individual artworks have certainly generated stellar returns on investment but equal numbers of artworks decrease in value: many contemporary artworks lost as much as 30-50% of their worth in the crash of 2008 and speculative trading of young contemporary artists has a destabilizing effect on their price levels.