Financial returns on collectible goods: A puzzle in the United States rare coin market

From 1970 until the mid-1980s, prices of rare coins increased dramatically. After 1985 average coin prices fell by about 75% during a time of economic prosperity. In contrast, prices of U.S. equity were flat in the 1970s and rose significantly thereafter. My goal is to try to explain the price behavior of numismatic coins and deduce the factors responsible for driving coin returns. Using prices from the Coin Dealer Newsletters (the "greysheets") and the Certified Coin Dealer Newsletters (the "bluesheets"), I assemble a panel data set of over two thousand individual coins. I model the financial returns on coins as a function of several important factors: returns on silver, the level of expected inflation, returns on a market portfolio, and tastes for coins. The empirical results suggest that high returns on silver and high expected inflation are responsible for the large run-up in coin prices during the 1970s and early 1980s. After 1985 coin returns fell as silver prices dropped and monetary policy stabilized. Coins were perceived as a safer asset and thus yielded lower financial returns. Under certain assumptions, nonpecuniary returns (or utility returns) on coins can be represented as residuals from coin excess return regressions. Given the relationship that holds between coin returns and the other variables in the econometric model, one must infer that nonpecuniary returns on coins increased dramatically from 1980 to 1990. This is perplexing, as it would imply that tastes for coins increased significantly over such a short horizon. In addition to these results, I find that even after controlling for a large set of coin characteristics, rarer coins and coins of a lower grade offer higher financial returns. Differences in riskiness and inefficiencies between rare and common coins do not explain the difference in financial returns between these two coin types. In addition to being less risky, rare coins have lower utility returns than common coins. This suggests that there is a market segmentation effect where more speculative-type investors are collecting rare coins while collector-types are buying common coins.