Beyond the negative relation between return and conditional volatility in the wine market: Is fine wine particularly luscious for investors?

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.

Citation

I. Bouri, E. (2014), "Beyond the negative relation between return and conditional volatility in the wine market: Is fine wine particularly luscious for investors?", International Journal of Wine Business Research, Vol. 26 No. 4, pp. 279-294. https://doi.org/10.1108/IJWBR-01-2014-0006