Are Exotic Assets Contagious?: Evidence From the Global Financial Crisis of 2007-2009

Are Exotic Assets Contagious?: Evidence From the Global Financial Crisis of 2007-2009

Dimitrios Dimitriou (National and Kapodistrian University of Athens, Greece) and Theodore Simos (University of Ioannina, Greece)
Copyright: © 2020 |Pages: 18
DOI: 10.4018/978-1-7998-2436-7.ch005


In this study, authors investigate the possibility of contagion/safe haven effects during the Global Financial Crisis (GFC) of 2007-2009 for two exotic assets: rare coins and wine lvx50. The data sample is monthly comprising a rare coins and wine lvx50 indices, as well as MSCI (Morgan Stanley Capital Index) World financial index as a benchmark for world financial sector, spanning from 2000 until 2016. According to Baur and Lucey (2010) an asset may be characterized as safe haven, by the following definition: “A safe haven is defined as an asset that is uncorrelated or negatively correlated with another asset or portfolio in times of market stress or turmoil”. Employing a bivariate GARCH (1,1)-DCC model, authors uncover significant evidence of contagion effects among the MSCI World Financial and wine lvx50, while the pair MSCI World Financial and rare coins show a safe haven behaviour. These findings confirm a specific pattern of contagious and safe haven behaviors that provide important implications for international investors.
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Such turmoil conditions were affected the world economy during the last decade. Thus, it seems an interesting idea for researchers to examine the behaviour of unorthodox assets for portfolio diversification reasons, namely “exotic assets”. To the best of our knowledge it is the first study that on two unorthodox exotic assets: rare coins and wine. The so-called “exotics”, used to be non-traditional financial investments that hedge funds choose for diversification, hedging and return-enhancement reasons. Money managers have begun to look exotic assets as way to diversify risk while searching for assets that may provide a safe haven during turmoil period. Critics, however, call them too risky and opaque. Some examples of “exotic” assets are artist rare instruments, expensive French wine, rare coins and rare collectables in general. Exotic assets and unorthodox investments in general are a high priority issue during crises, since as Bernanke quotes:

I think one of the lessons of the Depression - and this is something that Franklin Roosevelt demonstrated - was that when orthodoxy fails, then you need to try new things. And he was very willing to try unorthodox approaches when the orthodox approach had shown that it was not adequate.

According to Baur and McDermott (2010):

A haven is defined as a place of safety or refuge. In times of stormy weather, ships seek out the safe haven of a port or harbour to ride out the storm. A safe haven asset must therefore be some asset that holds its value in ‘stormy weather’ or adverse market conditions. Such an asset offers investors the opportunity to protect wealth in the event of negative market conditions.

The exotic assets considered by many investors as not only a shield against financial crises but also as a high return investment. The authors are going to investigate this “wish” in depth throughout this chapter.

This work focuses on the impact of the Global Financial Crisis (2007-2009) on rare coins and wine, which made the world stock markets to tremble. The authors empirically investigate the time-varying conditional correlations of monthly Morgan Stanley Capital Index (MSCI, hereinafter) World Financial, Rare coins and Wine indices. In order to empirically investigate contagion among equity and currency markets, the authors model simultaneously the dynamic conditional correlations (DCC, hereinafter) for the pairs: i) MSCI World Financial-Rare coins and ii) MSCI World Financial-wine via two bivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH, hereinafter) GARCH (1,1)-DCC models. The authors also test for a level shift increase of DCCs during the crisis period by incorporating a dummy variable in an Ordinary Least Squares (OLS, hereinafter) equation. Based on previous literature (Dimitriou et al., 2013; Dimitriou & Kenourgios, 2013; Bank of International Settlements –BIS-, 2009) the authors define the Global Financial Crisis (GFC, hereinafter), the period setting the starting date at 1st August 2007 and the end date the 31st March 2009.

This paper contributes to international finance literature in at least two ways. Firstly, the authors provide a robust analysis of time-varying correlations among markets that goes beyond a simple analysis of correlation breakdowns. By employing a DCC model the authors investigate the second order moments dynamics of financial time-series, overcoming the heteroskedasticity problem raised by Forbes and Rigobon (2002). Secondly, the authors focus on rare coins and wine, two unique exotic assets. The authors are not aware of any study testing various “exotic” assets, such as wine and rare coins, as most safe haven literature focus mainly on precious metals (such as gold, silver etc.). Although many studies mainly support the safe haven attitude of gold (see, e.g., Bredin et al., 2017; Baur & Lucey, 2010; Baur & McDermott, 2010), its price has been skyrocketed after 2008.1 Thus, it seems that investors have to pay a high price for the feeling of security. In parallel to continuous uncertainty in financial markets (i.e., the ongoing Brexit procedure and the overall increase of global geopolitical risk), the need for safe haven assets is more imminent than ever. This evidence is enhance the examination of wine and rare coins as alternative safe haven assets.

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