Beyond the negative relation between return and conditional volatility in the wine market

Abstract

Purpose – The purpose of this paper is to examine fine wine’s safe-haven status with respect to US equity movements. Design/methodology/approach – We use a generalized autoregressive conditional heteroscedasticity model and its variant to measure the asymmetric reaction to positive and negative shocks. Findings – Our empirical results show an inverted asymmetric volatility in the wine market; positive shocks increase the conditional volatility more than negative shocks. That is the opposite reaction in the volatility of equity returns occurs in the wine market. As leverage effect and volatility feedback effect do not adequately explain this reaction, we follow the work of Baur (2012) and propose the safe haven effect. Several robustness tests largely confirm the empirical findings, with major implications for wine investors. Finally, we provide further evidence on the benefits of adding wine investments to an equity portfolio through an increase in risk reduction effectiveness. Research limitations/implications – Based on the results of the robustness analysis, the recommendations in terms of including fine wines in portfolios must be issued with caution. Practical implications – Our findings are crucial to the needs of market participants who are interested in including wine assets in their equity portfolio. Originality/value – No previous study investigates the safe haven property of fine wine return, and accounts for risk reduction effectiveness when adding wine assets to a portfolio of US equities.

Fine Wines and Stocks from the Perspective of UK Investors: Hedge or Safe Haven?

“…Our empirical results indicated a negative dynamic conditional correlation between fine wine and the UK stock market, suggesting the effectiveness of using fine wine as a hedge. With different methodology, this finding corroborates previous studies showing the significant diversification benefits from adding wine to a portfolio comprising stocks (Bouri, 2014; Fogarty, 2010; Kourtis et al, 2012; Masset and Henderson, 2010; Masset and Weisskopf, 2010). However, during periods of extreme stress, fine wine was a very weak safe haven against the UK stock market risk.…”

“…Accordingly, fine wine reduces risk during periods of extreme price movements in UK equities. Our results complement the work of Bouri (2014), who found that wine investment can provide protection against overall downside risk in the stock market.…”

“…In order to capture the potential benefits of diversification, however, portfolio management requires the examination of assets beyond the simple study of risks and returns. Exceptions to this strand of wine literature are of Bouri (2014), Fogarty (2007, 2010), Kourtis et al (2012), Masset and Henderson (2010), Masset and Weisskopf (2010), and Sanning et al (2008), who addressed this issue. Based on the efficient frontier method, Fogarty (2007) provides evidence that the inclusion of fine wine in a portfolio of stocks and bonds leads to a better risk-return trade-off.…”

“…The authors highlight that diversification benefits are significant in the wine markets of Italy, Australia, and Portugal, and, to a smaller extent, in the French market. More recently, Bouri (2014) focuses on the negative relation between return and conditional volatility in the wine market and reveals that past positive shocks increase the current conditional volatility to a greater extent than past negative shocks. As neither the leverage effect nor the volatility feedback effect adequately explains this inverted 1 asymmetric volatility in the wine market, Bouri (2014) proposes the safe haven effect as an explanation.…”

“…In particular, measuring unconditional correlations between fine wine and other assets to assess diversification possibilities (Kourtis et al, 2012) is inappropriate, given the empirical evidence that correlations between assets are conditional and time-varying (Bouri, 2013). Bouri (2014) focuses only on the safe haven role of fine wine and thereby overlooks the hedge effect. To complement these works, we examine the hedge and safe haven properties of fine wine using a suitable generalized autoregressive conditional heteroskedasticity (GARCH) framework capable of capturing the dynamic conditional correlations across the data series, on average and during periods of stress in particular.…”