Art-secured Lending: A Risk Analysis Framework

28 Pages Posted: 19 Jan 2021

See all articles by Ventura Charlin

Ventura Charlin

V.C. Consultants; EVENTUS ANALYTICS; V.C. Consultants

Arturo Cifuentes

CLAPES--UC

Multiple version iconThere are 2 versions of this paper

Date Written: March 6, 2020

Abstract

In recent years, art-secured lending has grown in both size and popularity. Yet, this business still lacks a well-accepted approach to assess the risks involved. To that end, in this study, we identify the three types of risks involved in an art-secured lending operation and present a framework to assess their combined effects via a Monte Carlo simulation. In addition, we derive some useful closed-form expressions that are suitable when the collateral consists of only one painting. To help decision makers and risk managers, we introduce a number of risk-related metrics that provide a detailed characterization of the lending operation risk profile. We conclude that with the customary loan-to-value ratios currently prevalent in the art-based lending business (around 50%), the lender’s exposure is quite bounded. Moreover, the advantages of having a diversified collateral, from a risk perspective, are relevant. Finally, we find that the uncertainty related to the value of a painting is much more important than the uncertainty related to either the credit risk profile of a borrower or the artist’s returns during the period that a loan remains outstanding.

Keywords: financial risk management, Monte Carlo simulation, art-secured lending, market risk, credit risk

Suggested Citation

Charlin, Ventura and Cifuentes, Arturo, Art-secured Lending: A Risk Analysis Framework (March 6, 2020). Journal of Credit Risk, Vol. 16, No. 2, 2020, Available at SSRN: https://ssrn.com/abstract=3769160

Ventura Charlin (Contact Author)

V.C. Consultants ( email )

230 East 73rd Street
7D
New York, NY 10021
United States
9147070723 (Phone)

HOME PAGE: http://vc-consult.com

EVENTUS ANALYTICS ( email )

230 E 73rd Street
New York, NY New York 10021
United States

V.C. Consultants ( email )

United States

Arturo Cifuentes

CLAPES--UC ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

HOME PAGE: http://https://arturocifuentes.com/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
132
PlumX Metrics