The collateral value of fine art [An article from: Journal of Banking and Finance]

This digital document is a journal article from Journal of Banking and Finance, published by Elsevier in 2007. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
In this paper, we examine the effect of implicit seller reserves on the estimation of value-at-risk based on historical asset sales data. We direct our examination toward how and whether fine art might prove an appropriate form of loan collateral for banks and other financial institutions. Using a data set of French Impressionist paintings brought to auction from 1985 to 2001, we control for the effect of works that are bought in-house to construct a distribution of potential sale values that corrects for sample selection bias. It turns out that the downside risk surrounding deviations of auction prices from expert presale estimates depends critically on how buy-ins are incorporated. If downside risk is assessed solely on historical experience with successful auction sales, the data appear to support loan-to-value ratios between 50% and a 100% larger than loan-to-value ratios that countenance the existence of seller reserves. The auction process, however, is quantifiable and can reveal the necessary risk information required for loan consideration.