Correlation between top incomes, equity and art prices

There is a correlation between top incomes and art prices. A significant study by The researcher duo from Tilburg University, Luc Renneboog and Christophe Spaenjers along with William N. Goetzmann of Yale School of Management concludes that it is ‘the wealth of the wealthy’ that pushes up and drives art prices, a phenomenon closely linked to stock swings.

Their new research document, ‘Art and Money’, investigates the impact, if any, of equity 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, 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.

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.

Curiously, the researchers also dug out evidence to show that art prices happen to go up when inequality in a country rises, though this assumption doesn’t hold true particularly for the post-World War II period in the UK. However, they do establish the positive correlation between art prices and inequality in the US during post World War II phase.