Philippe Masset

Wine as an Alternative Asset Class

Using a dataset that spans the period 1996 to 2007 and contains transaction prices for all reported auctions at the Chicago Wine Company, we analyze how the prices of high-end wines have evolved during this time period. The best wines according to characteristics like vintage, rating and ranking earn higher returns and tend to have a lower variance than poorer wines. Nevertheless, the different categories of wines seem to follow a rather similar trend over the long run. Wine returns are only slightly correlated with other assets and can consequently be used to reduce the risk of an equity portfolio. Wine looks even more attractive when the investor also has concerns about the skewness of his portfolio. However, the part to be invested in wine is reduced once the kurtosis is included into the analysis. Finally, it seems advisable to diversify across different wine categories as their short-run movements are partially independent of each other. First growths and wines rated as extraordinary by Robert Parker deliver the best tradeoff in terms of portfolio expected returns, variance, skewness and kurtosis for most investor preference settings under consideration. (JEL Classification: C60, G11, Q11)

A High-Frequency Investigation of the Interaction between Volatility and DAX Returns

One of the most noticeable stylised facts in finance is that stock index returns are negatively correlated with changes in volatility. The economic rationale for the effect is still controversial. The competing explanations have different implications for the origin of the relationship: Are volatility changes induced by index movements, or inversely, does volatility drive index returns? To differentiate between the alternative hypotheses, we analyse the lead-lag relationship of option implied volatility and index return in Germany based on Granger causality tests and impulse-response functions. Our dataset consists of all transactions in DAX options and futures over the time period from 1995 to 2005. Analyzing returns over 5-minute intervals, we find that the relationship is return-driven in the sense that index returns Granger cause volatility changes. This causal relationship is statistically and economically significant and can be clearly separated from the contemporaneous correlation. The largest part of the implied volatility response occurs immediately, but we also observe a smaller retarded reaction for up to one hour. A volatility feedback effect is not discernible. If it exists, the stock market appears to correctly anticipate its importance for index returns.

Analysis of Financial Time-Series Using Fourier and Wavelet Methods

This paper presents a set of tools, which allow gathering information about the frequency components of a time-series. We focus on the concepts rather than giving too much weight to mathematical technicalities. In a first step, we discuss spectral analysis and filtering methods. Spectral analysis can be used to identify and to quantify the different frequency components of a data series. Filters permit to capture specific components (e.g. trends, cycles, seasonalities) of the original time-series. Both spectral analysis and standard filtering methods have two main drawbacks: (i) they impose strong restrictions regarding the possible processes underlying the dynamics of the series (e.g. stationarity), and, (ii) they lead to a pure frequency-domain representation of the data, i.e. all information from the time-domain representation is lost in the operation. In a second step, we introduce wavelets, which are relatively new tools in economics and finance. They take their roots from filtering methods and Fourier analysis. But they overcome most of the limitations of these two methods. Indeed their principal advantages are the following: (1) they combine information from both time-domain and frequency-domain and, (2) they are also very flexible and do not make strong assumptions concerning the data generating process for the series under investigation.

Wine Funds: An Alternative Turning Sour?

This article examines the performance, selectivity, and market-timing abilities of wine fund managers over the 2000–2013 period. The authors hypothesize that wine fund managers should be able to profit from market inefficiencies on the wine market and generate abnormal returns for investors. Their results show that fund managers’ overall selectivity and market-timing abilities appear to be limited. Only one fund offers positive risk-adjusted returns and two funds show a tendency for market timing. Considering non-quantifiable risks, wine funds thus do not appear to be interesting investments.

Properties of High Frequency DAX Returns: Intraday Patterns, Jumps and their Impact on Subsequent Volatility

This paper analyzes the behavior of the German DAX index intraday returns. We devote particular attention to three related empirical issues. First we provide an up-to-date characterization of the DAX intraday volatility patterns. They are mostly W-shaped with peaks at the opening, at 2.30pm and before the closing. We find some evidence suggesting that the implied volatility also follows some deterministic patterns over the trading day. Second we identify jumps in DAX returns. On jump days, they account on average for 15% to 25% of the daily variance. Jumps also tend to cluster and are not evenly distributed throughout the trading day. Third we estimate the impact of a price jump on volatility. We consider different proxies for volatility: absolute returns, implied volatility and realized volatility. Our results indicate that negative jumps trigger a strong upward correction in volatility. This correction starts just after a jump occured and persists during up to 25 minutes. On the other hand, positive jumps seem to have a much less significant impact on volatility. These results hold for all volatility proxies but they are more significant when we consider the implied volatility.

When Rationality Meets Passion: On the Financial Performance of Collectibles

This article examines prior evidence and proposes an empirical study of the performance of passion investments in comparison with financial and real assets over the past 20 years. Over this period, classic cars and fine wines (but not visual art) display better returns than U.S. equity, fixed income, and real estate. Volatilities are, overall, low but increase once returns are adjusted for the inherent illiquidity on collectible markets. In a CAPM framework, only classic cars yield significant risk-adjusted returns with an annualized alpha of 5%. At the same time, correlations and systematic risk are low for all collectibles. This diversification benefit is confirmed by a 7% portfolio risk reduction following the inclusion of collectibles in a traditional financial portfolio. The authors further document that the inherent segmentation of collectible classes extends the benefits of cross-asset to intra-asset class diversification. Finally, they find that collectibles have performed slightly less well since the Global Financial Crisis.

A study of the performance of fine wine on the Swiss market

This paper studies the price evolution and the performance of an investment in fine wine on the Swiss market over the period 2002-2012. Using a repeat-sales-regression approach we calculate different wine indices based on auction hammer prices obtained by Steinfels Weinauktionen. Our results show that different fine wines followed a similar evolution across the sample period but that the amplitude of returns strongly depended on wine regions and types. While Bordeaux and Burgundy wines performed well, wines from the Rhone valley and Italy show a poorer performance. Compared to financial assets wine has significantly outperformed stocks, but not bonds. We further find that the Swiss franc appreciation has had a significant impact on wine prices.

A Study of the Evolution of High-End Wines in Switzerland

In this paper, we analyze the evolution of fine wine prices over the period 2000-2010 on the Swiss market. We first estimate a fine wine index with several sub-indices (e.g. Bordeaux index, First growth index) using hand-collected hammer prices from Steinfels – the leading wine auction house in Switzerland. We then study the evolution of these wine indices. Not surprisingly, we find that high-end wines have achieved impressive returns over the last decade, with first growths from the Medoc being the very best performers. They have significantly outperformed Swiss stocks whilst maintaining a weak correlation with traditional asset classes like equities and bonds. These results confirm previous evidence that fine wine can be considered as an appealing alternative investment vehicle.