Volatility spillovers between fine wine and major global markets during COVID-19

What is it about?

Motivated by the growing necessity of portfolio diversification, this paper investigates the dynamic connectedness among fine wine, equities, bonds, crude oil, commodities, gold, copper, shipping and real estate by applying the Diebold and Yilmaz (2012) approach, based on the time-varying parameter vector autoregressive (TVP-VAR) model of Antonakakis et al. (2020), for the period 1/1/2010-5/31/2021. Our results indicate moderate volatility spillovers among the markets over time, whereas total connectedness is prone to exogenous shocks, reaching its peak during stress periods. Equities, crude oil, gold and fine wine are the net contributors of spillovers, whereas real estate, commodities, copper, bonds and shipping constitute the net receivers of the diffused shocks. Furthermore, we estimate and compare the hedging ability of fine wine, before and after the emergence of the coronavirus pandemic, to instruct investors in rebalancing their portfolio strategies during COVID-19. The empirical findings suggest that fine wine can form an effective hedging tool to reduce the risk deriving from adverse movements of the markets and its hedging ability was enhanced during COVID-19, with few exceptions. Regardless time period, the highest hedging effectiveness can be achieved by taking a long position in the volatility of crude oil and a short position in the volatility of fine wine.

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Why is it important?

The contribution of our research to the existing literature is twofold. First, this is the first attempt to incorporate fine wine in a generalized VAR spillover framework. Although there are research endeavors encompassing other alternative assets to a transmission mechanism of volatility spillovers, like environmental, social and governance investments (Umar et al., 2020), Sukuk (Samitas et al., 2021) or hedge funds (Papathanasiou et al., 2021), fine wine has never been included in similar studies. Investing in fine wine may seem slightly sophisticated, but it is a rapidly growing market, as the U.S. wine market alone was estimated at $61.80 billion in 2017 . In order to investigate connectedness, our research employs a contemporary empirical approach: the extended modification (TVP-VAR) of the Diebold and Yilmaz (2012) framework. The TVP-VAR model overcomes certain limitations of the Diebold and Yilmaz (2012) approach, as it provides more accurate parameter estimates, allowing variances to vary over time, and being less sensitive to outliers. In addition, the applied methodology takes advantage of all the available observations at our disposal, as no rolling-window analysis is involved, surmounting an arbitrary setting of the rolling-window size. Second, we check whether fine wine can contribute to a well-diversified portfolio that is essential for managing risk and countering periods of volatility in the market. In this direction, our study also provides portfolio hedging strategies, combining fine wine with a battery of financial instruments for the first time. We use an extended sample by taking into account a wide variety of asset classes, including shipping and real estate markets, which are less frequently studied in the literature. In this way, the selected indices are representative of the different types of international investors looking for optimal asset allocation.

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