Volatility of Price Indices for Heterogeneous Goods with Applications to the Fine Art Market
Version of Record online: 24 SEP 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 30, Issue 2, pages 291–312, March 2015
How to Cite
2015), Volatility of Price Indices for Heterogeneous Goods with Applications to the Fine Art Market, J. Appl. Econ., 30, pages 291–312. doi: 10.1002/jae.2355, and (
- Issue online: 2 MAR 2015
- Version of Record online: 24 SEP 2013
- Manuscript Revised: 1 AUG 2013
- Manuscript Received: 27 NOV 2012
Price indices for heterogeneous goods such as real estate or fine art constitute crucial information for institutional or private investors considering alternative investment decisions in times of financial markets turmoil. Classical mean-variance analysis of alternative investments has been hampered by the lack of a systematic treatment of volatility in these markets. In this paper we propose a hedonic regression framework which explicitly defines an underlying stochastic process for the price index, allowing to treat the volatility parameter as the object of interest. The model can be estimated using maximum likelihood in combination with the Kalman filter. We derive theoretical properties of the volatility estimator and show that it outperforms the standard estimator. We show that extensions to allow for time-varying volatility are straightforward using a local-likelihood approach. In an application to a large data set of international blue chip artists, we show that volatility of the art market, although generally lower than that of financial markets, has risen after the financial crisis of 2008–09, but sharply decreased during the recent debt crisis. Copyright © 2013 John Wiley & Sons, Ltd.