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Abstract
This paper uses auction hammer prices over the period 1996-2009, with a special emphasis on
periods of economic downturns, to examine risk, return and diversification benefits of fine wine.
Our research shows evidence that the wine market is heterogeneous with wine regions and price
categories evolving differently in terms of volume and turnover. We construct wine indices for
various wine regions and prices using repeat-sales regressions and find out that fine wine yields
higher returns and has a lower volatility compared to stocks especially in times of economic
crises. Forming portfolios for typical investors and taking risk aversion, different financial assets
and various wine indices into consideration we confirm that the addition of wine to a portfolio as
a separate asset-class is beneficial for private investors. Not only are returns favourably impacted
and risk being minimised but skewness and kurtosis are also positively affected. Particularly,
during the recent financial crisis these effects are most pronounced and improve portfolio
diversification when it is most needed. Most importantly, balancing a portfolio with fine wine has
resulted in added return while reducing volatility with the most prestigious and expensive
vintages and estates outperforming the General Wine Index (GWI) during the entire research
period. Results from the CAPM show that alpha is significantly positive over the period 1996-
2009 while showing a low beta coefficient. The use of a conditional CAPM model allows us to
clarify the time-variance of alphas and betas depending on the economic environment that is not
generally captured by the traditional CAPM. The time-varying dynamics of alphas and betas are
in particular best explained by the spread between BAA- and AAA-rated bonds and the
USD/EUR foreign exchange rate. Our findings confirm that wine returns are primarily related to
economic conditions and not to the market risk.