Bubbles and Trading Frenzies : Evidence from the Art Market

The art market is subject to frequent booms and busts in both prices and volume,<br/>which are difficult to reconcile with models where agents are rational and<br/>hold homogenous beliefs. This paper shows that (i) volume is mainly driven by<br/>speculative transactions; (ii) positive price-volume correlation is pervasive across<br/>art movements, and is larger for the most volatile segments of the art market; (iii)<br/>volume predicts negative long-term returns, a relation that is statistically and economically large. Overall, our evidence supports the bubble model of Scheinkman<br/>and Xiong (2003), which predicts that speculative trading can generate significant<br/>price bubbles, even if trading costs are huge and leverage is impossible.