Does the law of one price hold in non-standard investment markets? Why selling picasso in New York is differents

In the art market there is evidence that arbitrage does not necessarily equalize prices of comparable objects across different cities of sale. The aim of this study is to analyze why the distribution of prices differs between New York (NY) and the Rest of World (RoW). Two questions are addressed: (i) does the distribution change because items sold in NY have different characteristics than items sold in the RoW? (ii) is the distributional change unrelated to these characteristics, and attributable to differences in the hedonic price functions across markets? The unconditional Recentered Influence Function (RIF) regression method is used to investigate the differences across quantiles in the distribution of returns. Secondly, based on quantile RIF-regressions, we decompose price distributions across different markets. This method decomposes the price differential for any quantile. Our main finding is that arbitrage seems to happen with Picasso’s ‘blue chips’, represented by the early (and more expensive) works, while it fails with Picasso’s later paintings, which are much more heterogonous and whose value on the market is lower.