Is art a haven in times of political or financial crisis? To answer this question, Yuexin Li of Renmin University of China and her co-authors trace the long-term performance of the UK art market during world wars, economic recessions, financial crises, inflationary periods, and changes in monetary policy by digitalizing historical auction archives to construct art price indices from the early 20th century onwards.

It is shown that annual art auction value grew, in real terms, more than seven-fold over the past century, with the arithmetic annual real return and risk amounting to 3.6% and 20.1%, respectively. Art returns plummeted at the onset of wars, but in the later years of war periods, returns became positive and outperformed equities, suggesting that art served as a hedge against political uncertainty. During war times, smaller and thus transportable paintings obtained higher returns.

Art, on the other hand, was sensitive to economic and financial crises, with the largest slumps occurring in the post-WWI recession, the Great Depression, the oil crisis, the recessions of the early 1980s and early 1990s, and the Great Recession. 1931 (-63%) and 1991 (-37%) show by far the largest declines in art returns when the largest art market bubble burst.

In this Quantitative History Webinar, Yuexin Li will highlight changes in art preferences for specific paintings by size, art school, art objects’ liquidity, and artists’ nationalities during different crises. The evidence suggests that art entered a broad optimal asset portfolio in both non-crisis periods and during war times, but the same did not occur during financial crises and economic recessions.

Yuexin’s co-authors: David Géraldine (Bibliotheca Wittockiana, Brussels), Kim Oosterlinck (Université Libre de Bruxelles) and Luc Renneboog (Tilburg University)

Discussant: Zhiwu Chen, Chair Professor of Finance, HKU Business School