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An options-based approach to analyze auction guarantees in the art market

Author

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  • Charlin, Ventura
  • Cifuentes, Arturo
Abstract
Auction-house guarantees are becoming a common feature in the art market. We analyze these guarantees within the framework of financial options. This approach allows us to derive analytical (closed-form) expressions to value these positions, considering both, the case in which the painting is sold, and the case in which the painting goes unsold (“bought in”). In addition, we present several risk metrics that are useful to describe from an intuitive viewpoint the exposure of the auction house, and that of a third party (in case the auction house decides to layoff, fully or partially, the risk associated with offering such guarantees). We demonstrate that the expressions we derive satisfy the put-call parity relationship, and we further validate these formulas with a Monte Carlo simulation applied to a realistic example. We also show that the risk associated with such guarantees is lower than what is commonly believed by market practitioners, and we expose the dangers of relying on the Black-Scholes model to value such guarantees. Finally, having explicit expressions to assess the risk involved in these guarantees helps to bring more transparency to a notoriously opaque segment of the art market.

Suggested Citation

  • Charlin, Ventura & Cifuentes, Arturo, 2020. "An options-based approach to analyze auction guarantees in the art market," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    • Handle: RePEc:eee:ecofin:v:51:y:2020:i:c:s1062940819304498
    DOI: 10.1016/j.najef.2019.101094
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    References listed on IDEAS

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    More about this item

    Keywords

    Art derivatives; Auction guarantees; Risk metrics; Risk management; Financial risk; Options valuation;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G1 - Financial Economics - - General Financial Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Z11 - Other Special Topics - - Cultural Economics - - - Economics of the Arts and Literature

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