Wine Price Risk Management: International Diversification and Derivative Instruments

Abstract

Variations in fine wine prices can be prominent and have widespread economic and financial implications. Although fine wine investments are dominated by French wines, we demonstrate that significant international diversification benefits exist for investors in Italian, Australian and Portuguese fine wines. This is important since we also find that diversification across varieties of French wine is not likely to be that effective. We propose the development of futures and options contracts on standardized wine price indices in order to enhance market completeness and to address the risk management needs of all market participants. Several popular continuous time processes are used to approximate empirically the dynamics of four fine wine price indices. On the basis of our results, we recommend appropriate equilibrium models for pricing fine wine futures and option contracts.