Estimating the Liquidity Premium of a Collectibles Basket Security
Blair (Matthew) Vorsatz, Finance PhD student
Collectibles, which range from paintings and classic cars to wine and stamps, constitute a large yet understudied asset class. I estimate the total float of all collectibles at $18.582 trillion in 2015, which dwarfs the total AUM of all hedge funds ($2.797 trillion, excluding funds of funds). Nevertheless, collectibles are often dismissed because of their large transaction costs; for example, the transaction costs in art auction sales are roughly 30% of the sales price. Investors would be more interested in collectibles if there existed a security that provided both liquidity and diversification across collectibles. Institutions would only create such a security if they could profit from selling it. To this end, I aim to derive an empirical estimate of the liquidity premium for a hypothetical fully-diversified exchanged- raded collectibles closed-end fund. If the estimated liquidity premium is sufficiently large, then designing such a security may be a profitable endeavor.