Establishing correlation between top incomes, stocks and art prices

The researchers-authors from Tilburg University, Luc Renneboog and Christophe Spaenjers along with William N. Goetzmann of Yale School of Management investigate the impact of stock markets and top incomes on art prices.

Employing a long-term art market index that comprises data on repeated sales right since the 18th century for their research document ‘Art and Money’, they demonstrate how equity market returns - both same-year as well as lagged - have a significant bearing on the price level in the art market.

The three financial experts with a keen interest in art come from the National Bureau of Economic Research. The basic purpose of their research document is to explore the link closely.Explaining the connection, they state: “Over a shorter time frame, we also come across empirical evidence that a rise in income inequality may well lead to higher prices for art, in line with the results of a numerical simulation analysis.

Finally, the results of Johansen co-integration tests strongly indicate the existence of a long-term relation between top incomes and art prices.”The researches reveal: “When the buying power rises, this can be expected to result in higher art consumption, and thus to a higher level of price in the art market.” How does one test that proposition in practical terms? To prove their point, the researchers look at stock market returns as a proxy to measure the wealthy individuals’ buying power, since they are the ones who buy art.

The three together created a price index for art spanning the time period 1765-2007, taking into account prices for the British market, since the country has been the prime center of the art market for most part of the period. They then related the index to the rise or fall in equity prices.

The comparative findings pointed to a strong correlation between the movements of the art market and the equity markets returns, something hardly surprising! To sum it up, the significant study concludes that it is ‘the wealth of the wealthy’ that pushes up and drives art prices, a phenomenon closely linked to stock swings.