PROJECT PRESENTATION

When an artist's rating stagnates or declines, the owners of the artist's works hesitate to put the objects up for auction for fear of selling them at a price lower than their purchase price, increasing the illiquidity of the market and decreasing sales house turnover. To encourage large private collectors to put their valuable works of art on the market, the auction houses usually offer guaranteed prices to sellers. But when the market turns or artists' ratings drop, this practice causes heavy losses to auction houses, and may bring them into bankruptcy.
 
The Algopole's Project aims at binding the artwork sale to the issuing of a call option, whose strike is greater than the guaranteed price offered by the sales house to the seller, and expiry date is the auction date. The call option is then sold by the sale house to a bank that will securitize the instrument in the form of call warrants and offer them to the retail investors on its financial product trading platform. The bank also ensures a secondary market on these products by providing at all times a bid price and an ask price for the warrants. It remunerates itself on brokerage costs, warrants issuing fees calculated as a percentage of the option strike, and on the bid/ask spread for each transaction.
 
The creation of options on adjudication aims to bring liquidity to transactions in auction rooms, and allow the sales house to guarantee a price to the sellers of pieces of art, by transferring the risk to the buyers of calls warrants obtained by securitisation of options, and not on the institution itself. The target clients are bidders in auction houses, private collectors, large specialized investment funds, and art lovers wishing to bet on the awarding of prestigious works of art. The options are issued for works of which the low estimate is over a million dollars.
 
The binding of a call option at the artwork auction is likely to be put in place when the seller wants a guaranteed price for his work of art, usually above the purchase price, because it fears a bad sale, and a bank estimates that the sale will exceed this guaranteed price and will attract investors in call warrants.
 
verdier
 
hockney
 

        SOLUTION KEY POINTS

The principles of the solution proposed by Algopole are as follows:
 
  • For each artist a law of distribution composed of a measure of Dirac in zero to model unsold, and a Weibull law with two parameters, sharpness s and dispersion d, to model the historical results of the artist's previous sales. To make the auction results of the works of the same artist and and the works of various artists coherent, the distribution data are calculated as the hammer price of each artwork divided by its low estimation, when both values exist and are strictly positive.
     
    This methodology removes all bias factors such as type, style, date, the size of a work or the influence of currency, inflation or place of sale. The duration of the history depends on the number of auctions for each artist, but it is usually taken from over the last five years. The model parameters are estimated by the maximum of the log-likelihood and are continuously adjusted according to the auctions of the works of the artist in the various sales houses around the world.
     
  • The strike value of the option is calculated as the break even between the difference between the strike and the reserve price minus the commissions for issuing the warrants, and the option price calculated in the real universe from the Weibull distribution law of the artist, assuming the zero market risk premium. The option maturity is equal on the scheduled auction date of the artwork.
     
    If the auction price exceeds the strike, the difference is won by all the buyers of call warrants in relation to the quantity of securities held, multiplied by the parity of warrants. If the hammer price is lower than the reserve price, the owner shall keep the work of art, which can be returned for sale later. Otherwise, he gets the guaranteed price paid through premiums given by investors in call warrants.
     
  • An efficient border is calculated on the volatility/performance graph displaying by a point the two parameters of Weibull's distribution law for each artist. This border allows to determine which artists are likely to to be backed up by a option on adjudication in a public sale.
     
van gogh
 
lichtenstein
 
beaubourg
 
border
 

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