Towards a Monotonicity-Compliant Price Index for the Art Market

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.