As 2015 fades into memory, WineQuant presents some thoughts on value and risk in the fine wine market, which may prove useful in 2016.
Value & Risk in Fine Wine, Post 1: The call for new tools
In the fixed income, equity and commodity markets, practitioners use a range of standard visualization tools to think about financial quantities. In fixed income markets, the shape of yield curves indicates the time value of money. In equity markets, implied volatility surfaces provide snapshots of future price expectations and in commodity markets, forward curves indicate the relationship between cost of carry and current / future demand for an asset.
Patterns of thinking develop around the standard tools used. Discussions about relative value, risk and uncertainty inevitably reference the common tool-set of the professional market participant. An advantage of a commonly held tool-set is that the salient characteristics of complex financial dynamics can be understood and communicated at a high level. A disadvantage of a common tool-set is that (unsophisticated) participants may rely on the received wisdom without a good understanding of its limits (examples abound!). Key risks may be masked by a tool’s layer of abstraction.
In alternative asset markets, should we re-purpose standard tools that exist in developed markets or start afresh and build new tools and standards?
Practitioners in alternative asset markets are often familiar with the “standard” markets and their tool-sets. Many fine wine market participants have graduated from (or are well-acquainted with) equity and fixed income markets. So our first instinct might be to try and re-purpose some of the standard issue thinking gear for the wine world.
My view is that we should resist the temptation and start from scratch. The shape of a curve of wine values against a time dimension may look like a “normal” yield curve, but this does not mean intuition from bond markets transfers sensibly.
Let’s work from the ground up. If parallels to existing markets and their tools appear, it will be an interesting side-show.
A taste of tools to come
Over the next few posts in this series, we will look into three tools WineQuant has developed for fine wine market analysis. The first, which we call the Channel Spread, indicates secondary market demand and is useful to chart the fine wine market cycle. Second, Relative Price Lines, provide a snapshot of price levels over time and relative prices across vintages. Third we look at Age Curves, which we have used to look into the relative effects of i.) overall market cycles and ii.) the investment grades of wines.
MK @ WineQuant
Value & Risk in Fine Wine by WineQuant is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Based on a work at https://winequantblog.wordpress.com/.