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We would like to thank Paul Cashin, Joshua Charap, Reda Cherif, Katerina Kalcheva, Joannes Mongardini, David O. Robinson, Abdelhak Senhadji and Fatih Yilmaz for their insightful comments and suggestions. We are also grateful for the cooperation of Liv-ex Fine Wine Exchange. Responsibility for remaining errors and omission lies with the authors.
Cashin and McDermott (2002) provides an overview of the empirical behavior of industrial commodity prices since 1862, finding a downward trend in real commodity prices until 1999 and a ratcheting up in the volatility of price fluctuations.
We also found, in some specifications, cointegration between the logarithm of real oil and fine wine prices, but the relationship does not appear to be robust. Nevertheless, cointegration is not a necessary condition for the market integration. For example, non-stationary transaction costs could make a cointegrating relationship undetectable.
We also ran the same set of regressions with quarterly real GDP series. The results were not as robust as for monthly data and therefore they are not reported. Similar results were obtained by Frankel and Rose (2009) for annual data.
Demand sensitivity to higher prices is in general low—and it is lower in emerging economies than in advanced economies. This could be partly explained by price subsidies on domestic consumption in emerging markets. Although industrial countries have largely eliminated energy subsidies, developing countries continue to use price controls (Arze del Granado, Coady, and Gillingham, 2010). Such subsidies, however, keep prices below the full economic cost and lead to higher levels of consumption. Furthermore, price distortions may also discourage the adoption of efficient technologies, which further exacerbates the excessive energy demand.
The index consists of Bordeaux red wines that have scored 95 points or above on Robert Parker’s rating system, which is based on a 50-100 point quality scale, ranging from numerical ratings of 50–59 for wine “deemed to be unacceptable” to 96–100 for “an extraordinary wine of profound and complex character displaying all the attributes expected of a classic wine of its variety” vis-à-vis its peer group.
Global wine production is by definition available only on an annual basis. Therefore, for a given year, all months have the same production level in our estimations. We use a twelve-month lag in wine production to reflect the gap between production and marketing.
The equation is also estimated for nominal crude oil and fine wine prices. The results, available upon request, are similar to our findings for real crude oil and fine wine prices, which are not surprising given the high correlation between real and nominal prices over the sample period.
The global excess liquidity variable is stationary and therefore is included in the equations in level.
Estimations may suffer from simultaneous equation bias, but it is well known that oil supply and demand are inelastic to price changes, at least in the short run (Hamilton, 2009). For fine wine, production is inelastic, mainly since the supply of these wines is fixed because regulations in France make it impossible for the wine producers used in the Liv-ex Fine Wine Investable Index to expand production. Wine demand, however, would still be sensitive to short-term price changes.
Instrumental variables are the lagged values (up to four lags).
We also estimated the abovementioned equations with de-trended monthly data using Hodrick-Prescott (HP) filter (with λ = 1400) and found very similar results, which are available upon request. There are several methodological problems associated with filtering or smoothing (Saadi-Sedik and Petri, 2006).
Wald tests results show that we can decisively reject the null hypothesis of coefficients being equal.