Australian Aboriginal Art Index

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We are an investment art gallery in Sydney offering Indigenous artworks and Aboriginal art rental. Our team of art investing and art rental advisers are experts in financial planning, art wealth management and wealth creation and can help you with art and financial advice.

Indigenous Art Index™ (IAI70)

Top Prices realized by Australian Indigenous artists. Whilst this index is a comprehensive list of artists in ranked order of their top price realised at auction,  it does not include all artists ranked in the top 70 prices realised.  The top 10 artists listed here represent the top ten prices ever realised at auction, as well as being these artists highest price realised.

Download a List of Top 70 Australian Aboriginal Artists (by price) - IAI index 
 

Australian Aboriginal Art Index™ (AAAI)

Price indexes are an indispensible tool in discerning, assessing, and monitoring market trends. We propose a hedonic index for Australian Aboriginal art to track developments in this exciting segment of contemporary art.   Price indexes are an indispensible tool in discerning, assessing, and monitoring market trends. As the objective is always to interpret changes of an index in terms of changes in the underlying market, the objective is to minimise the volatility that ways of calculating an index add to the volatility of the market itself.

Especially in markets where heterogeneous goods are sold, or where the quality and attributes of the items traded can vary strongly from year to year, changes in market composition may add noise which can mask underlying trends. In the literature methods have been proposed to correct an index for market composition, and the corrected indexes are known as “hedonic indexes”.

Previous work on constructing an index for Australian art is reported in [Dedman (2009)], who constructed what is known as the Art Market Index (AMI) of Australian artworks. Unfortunately this index contains a number of subjective elements which we found difficult to justify, let alone port to the submarket of Aboriginal art, which prompted a wider study of the literature.

The established econometric theory of creating indexes for heterogeneous markets is that of so-called “Hedonic” price indexes. The basic ideas of hedonic price indexes are set out in [Triplett,J. (2004)], and the methodology of constructing a hedonic price index for a highly non-homogeneous market like the art market is set out in [Kraussl and van Elsland (2008)].

Download Research Here

 

Criticism of the AMI

The AMI seems to account in an ad-hoc way for the diversity of the art market, and is based on a number of assumptions for which it is not always easy to understand the justification. These are:
  • artist weight calculated as , with the weight of artist i, the weight of artist i based on sales volume, and the weight of an artist based on price
  • rather arbitrarily calculating the volume and price weights as
    
    
  • basing the index on the 60 artists with the highest index scores
  • including different media per artist depending on the difference between the index calculated with different media
  • absence of a mechanism to account for changes in the yearly composition of the art market
 
If anything, the AMI critically depends on expert judgment on part of its author. We therefore believe that the AMI can be improved upon by using the well-established econometric theory of Hedonic indexes.
 
To be fair, Dedman mainly seems to use the AMI to illustrate the value development of works by a single artist relative to the Index, rather than for the purpose of tracking market developments from an investor point of view.

Review of the methodology

The basic form of a price index is the year-on-year ratio of the harmonic mean of product prices:
                                                                                                               (1)
with:
          : an index set of goods 
       : the price of good  at time  tracks the price changes from time instance  to the next:
 
If the goods are all different, then index (1) will be reflect both the price development and the exact composition of the mix of goods sold during each time period. At best the impact of the goods mix is to add extra noise to the index, making it more volatile, or at worse obscure the price development in the market. For that reason there is an interest in deriving an index that is corrected for for the effects of changes in the goods mix. An example of such indexes is the hedonic index.
 
The basic idea behind hedonic price indexes is that the characteristics of the goods are the variables that determine the price buyers of the product are willing to pay for, and that the characteristics of the product are also costly or difficult to produce.
 
With a hedonic price index, an adjustment is made to the price of each good sold for changes in the mean characteristics of all goods on the market in that year. This adjustment is made on basis of the attributes of each good  to make the adjusted prices more comparable. This is called a hedonic price index, as defined in [Triplett, 2004]:
 
“A hedonic price index is any price index that makes use of a hedonic function. A hedonic function is a relation between the prices of different varieties of a product, such as the various models of personal computers, and the quantities of characteristics in them.”
 
By implication variables that do not have both “user value” and “resource cost” interpretations do not belong in hedonic functions.
 
The hedonic price index is then:
                                                                                       (2)
Where the hedonic quality adjustment accounts for the mean change in characteristics of the goods sold.

Calculating the quality adjustment

We will follow the approach taken in [Kraussl and van Elsland (2008)] who use the following (hedonic) price model:
                                                                                               (3)
 
The usual hedonic quality adjustment (which we will adopt) is:
                                             (4)
 
The hedonic index

Combining eqn. (4)  and eqn (1)  (2)  gives:
 
                                                 (5)
This is the index we will use.
Special adjustment for valuing paintings
In valuing paintings one of the characteristics that determine the price is the quality of the painting, for which the identity of the artist is often taken as a proxy. This takes the form of a dummy variable  in eqn. (3)  for artist parameter .
 
Unfortunately, introducing a dummy variable for each artist can greatly expand the number of coefficients  that must be estimated, which can severely over-parametrise the model. To overcome this problem, the following adjustment for artist quality is proposed in [Kraussl and van Elsland (2008)].
 
The idea is to adjust for artist-mix in the same manner as for year-on-year market composition with respect to a reference artist
                                                         (6)
The quantity  can then be used as a proxy for artistic quality and added to eqn. (5)  , thus exchanging  dummy variables (with (3) |

Accounting for medium on which the artwork is made

We propose to account for the medium on which the artwork is made by applying the same methodology proposed in [Kraussl and van Elsland (2008)] to create an medium-specific adjustment factor. We propose to use the most abundant medium as the reference medium.

Steps in constructing the index

The sequence of calculations as proposed in [Kraussl and van Elsland (2008)] then becomes:
  • estimate the parameters of eqn (3)  with artist dummies for a subset of artists to get an estimate for the parameters
  • use this estimate to calculate the index in eqn. (6)  for all artists
  • re-estimate eqn. (3)  on the entire dataset using this index as an additional explanatory variable while dropping all dummy variables
  • construct the index in eqn. (5)  using the parameter estimates from step 3 and the  variable obtained in step 2

 
Altruist Global Private Equity and Art Trust propose a hedonic index for Aboriginal art based on application of an existing methodology. It is shown that the volatility of the hedonic index is smaller than that of the uncorrected index while, on balance, tracking the same process as the uncorrected index.  As a result we recommend our AAAI hedonic index as a means to track developments in the market of Australian Aboriginal art, which can be used by investors, art funds, financial institutions and art insurance companies.

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