The Effect of an Electronic Exchange on Prices and Return Volatility in the Fine Wine Market

Abstract

Fine wine has become an attractive alternative asset class in recent decades. In our study, we take the market microstructural perspective and verify how innovations in trading infrastructure affect the fine wine market. More specifically, we examine the average prices and the return volatility of fine wines traded on three different trading systems: automated electronic exchange, auctions and over-the-counter agreements (the OTC market). Our findings confirm an important role of a fully automated, cost-effective wine exchange in improving pricing efficiency and reducing market risk. This may constitute useful information for professional wine traders and institutional investors, who might consider shifting from less transparent trading systems into an automated on-book venue. This may also be a valuable indication for the future development of trading infrastructure in wine and other agricultural commodity markets.

On Fine Wine Pricing across Different Trading Venues

“…Conversely, an electronic exchange is targeted at informed traders interested in high-volume trading, which implies lower price levels due to an increased scale of operation. Interestingly, the relationship between the auction prices and the equivalent Liv-ex prices corresponds to the price relationship indicated by Czupryna and Oleksy (2018) for both trading venues. Whether the fact that the lowest level of valuations is found in the OTC market is due to the larger number of informed traders active in this venue, their greater negotiating flexibility, or their substantial informational advantage over retail traders, is difficult to answer, owing to the unknown structure of traders and the unidentifiable transaction origin.…”

“…In practice, wine trading takes place in various venues, including traditional or online auctions, multiproduct trading platforms, wine exchanges, specialized online stores, or over-the-counter (OTC) markets. Based on the market microstructure theory (Madhavan, 2000;de Jong and Rindi, 2009) and the market standard implemented by the world's leading fine wine exchange-Liv-ex, all of these venues may be grouped into three major market types: (1) auctions (A) with a bidding mechanism involved in the pricing process, (2) an electronic exchange (L) with an order-driven trading platform, and (3) the OTC market (O) with offexchange bilateral B2B or B2C trades (Czupryna and Oleksy, 2018;Czupryna, Jakubczyk, and Oleksy, 2020a). The venues differ in terms of trading rules, transaction costs, settlement policies, or information distribution and attract various types of traders with diverse trading behavior.…”

On Pricing Unconventional Prepaid Forward Contracts: Evidence fromen primeurFine Wine

“…Fine wines have been widely regarded as an alternative asset class. Thus, an abundance of research in finance and wine economics examines their price behavior (Jones and Storchmann, 2001; Dimson, Rousseau, and Spaenjers, 2015; Breeden and Liang, 2017; Cardebat et al, 2017; Faye and Le Fur, 2019), investment attributes (Sanning, Shaffer, and Sharratt, 2008; Masset and Henderson, 2010; Bouri, 2015; Masset et al, 2017; Le Fur, Ameur, and Faye, 2016; Bouri et al, 2018), capabilities to hedge against inflation (Erdős and Ormos, 2013), interdependencies with other markets (Faye, Le Fur, and Prat, 2015; Bouri and Roubaud, 2016), and trading environment (Czupryna and Oleksy, 2018).…”