Towards a Monotonicity-Compliant Price Index for the Art Market

TL;DR

This paper proposes a new art market price index based on painting price per area, which is mathematically sound, monotonic, and addresses limitations of traditional hedonic model-based indexes.

Contribution

It introduces a simple, monotonicity-compliant index for art prices based on a hedonic model, improving upon existing methods.

Findings

The proposed index satisfies the monotonicity condition.

Traditional hedonic models may produce unreliable return estimates.

The new metric offers advantages demonstrated through examples.

Abstract

Notwithstanding almost forty years of efforts, the market for paintings still lacks a widely accepted price index. In this paper, we introduce a simple and intuitive metric to construct such index. Our metric is based on the price of a painting divided by its area. This formulation rests on a solid mathematical foundation as it corresponds to a particular type of hedonic model. However, unlike indexes based on the time-dummy coefficients of conventional hedonic models, this index satisfies the monotonicity condition. We demonstrate with a simple example the advantages of our metric. We also show the dangers of relying on the time-dummy coefficients of conventional hedonic models to estimate returns and generate price indexes.