As more players enter the art market with the aim of making a profit, the desire to accurately measure the financial performance of a given painter or painting is increasing. There has been a rise in economists and financial analysts bringing quantitative analytical techniques to bear on the art market. Most of these are the same techniques employed in more conventional markets, and focus on returns. However, specific characteristics of the art market – such as its illiquidity and its heterogeneity – make this a challenging task.
Against this backdrop, hedonic pricing models (HPMs) have been favoured for indices. These models are useful for dealing with the heterogeneous nature of the art market, as it takes into account the characteristics of each painting and also the external factors affecting its price.
However, hedonic art price indexes can cause problems too: according to professor of finance Arturo Cifuentes, they lack numerical stability, you need a great deal of (not always readily available) data to use them and sometimes you will obtain spurious results.
“There is also a lack of transparency,” he says. “Nobody knows exactly how it is computed so it’s not like the FT 100 where everybody knows the rules of the game. As the foundation for those indexes is dubious, it seemed to me that there was space for improvement.”
Cifuentes’ beautifully simple solution, devised in collaboration with applied statistician Ventura Charlin, is Artistic Power Value, or APV. Essentially the APV metric treats the value of art in a similar way to the value of real estate, measuring its value by dividing price by area.
“The APV is very transparent, and anybody can replicate the calculation very easily,” explains Cifuentes. “The APV offers investors a financial yardstick that goes beyond the price, while not attempting to control for the specifics of the painting beyond its area.”
He adds that he and Charlin have not set out to negate the individuality of each painting or to trivialise the artistic process; APV simply aims to make it easier to compare and contrast the value of objects that are usually dissimilar from each other.
The creation of the APV metric came about after a lengthy examination of existing metrics, which Cifuentes and Charlin concluded were unnecessarily complicated.
“We became aware that most of the variables from a modelling point of view were not as important as size. There is a big correlation for most art between size and price,” says Charlin.
“It seems intuitive to think about a paining as a reduced real estate, in which you look at price per unit of area. As long as you have secondary market sales by auction houses and you can perform a division, it is possible to compute it. The main issue is that you have to have the prices and the dimensions.”
APV makes it possible to rank artists by performance: for instance, Charlin and Cifuentes’ calculations have shown Matisse to outrank Gaugin and Gaugin to outrank Monet.
You can also measure the value of a particular painting or to track the performance of an artist throughout his or her career. For example, APV shows Monet to have had two peaks in his career, one when he was 30 and one in his late 60s when he created his famous water lily paintings.
Whether APV becomes more widely adopted as a way to measure value or performance throughout the art world remains to be seen.
“Broadly speaking I would say the response has been positive – we have had some very good feedback,” says Cifuentes.
The world of art indexes could be heading for a shake-up – and some de-mystification.