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The Returns on Investment Grade Diamonds

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  • Renneboog, L.D.R.

    (Tilburg University, Center for Economic Research)

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    Abstract

    Abstract: This paper examines the risk-return characteristics of investment grade gems (white diamonds, colored diamonds and other types of gems including sapphires, rubies, and emeralds). The transactions are coming from gem auctions and span the period 1999-2012. Over our time frame, the annual nominal USD returns for white and colored diamonds amount to 8.1% and 7.4%, respectively, or 5.5% and 4.8% in real terms. For a Euro investor, the returns on white and colored diamonds are about 1.3% lower than for a USD investors but the Euro returns still beat inflation by 3.5% annually. The returns for Other Gem types (rubies, emeralds and sapphires) are more volatile and somewhat lower (4.5% annual nominal returns and 2.1% in annual real terms). Applying the hedonic regression method to the data set of auction transactions of investment grade diamonds, we are able to explain more than 95% of their price variation in white diamonds. Although the diamond returns since 1999 have been below those on gold, both white and colored diamonds have significantly outperformed the US and European stock markets, US and European real estate, US government bonds, as well as European government and corporate bonds. The reward-to-risk (Sharpe ratio) of white diamonds is very close to that of US corporate government bonds. The highest Sharpe ratio (by far) over the past 14 years was the one on gold. Still, in times of crisis investments in diamonds have shown an attractive risk-return tradeoff. In spite of a small positive correlation between the diamond and the equity markets, adding diamonds to an equity portfolio still have some diversification advantages.

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    Bibliographic Info

    Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2013-025.

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    Date of creation: 2013
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    Handle: RePEc:dgr:kubcen:2013025

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    Web page: http://center.uvt.nl

    Related research

    Keywords: auctions; diamonds; gems; hedonic regressions; luxury goods; alternative investments;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. William Goetzmann & Luc Renneboog & Christophe Spaenjers, 2009. "Art and Money," Yale School of Management Working Papers amz2426, Yale School of Management, revised 01 Jan 2010.
      • Goetzmann, W. & Renneboog, L.D.R. & Spaenjers, C., 2010. "Art and Money," Discussion Paper 2010-08, Tilburg University, Center for Economic Research.
      • William N. Goetzmann & Luc Renneboog & Christophe Spaenjers, 2009. "Art and Money," NBER Working Papers 15502, National Bureau of Economic Research, Inc.
      • Goetzmann, W. & Renneboog, L.D.R. & Spaenjers, C., 2010. "Art and Money," Discussion Paper 2010-002, Tilburg University, Tilburg Law and Economic Center.
    2. Dimson, Elroy & Spaenjers, Christophe, 2011. "Ex post: The investment performance of collectible stamps," Journal of Financial Economics, Elsevier, vol. 100(2), pages 443-458, May.
    3. Combris, Pierre & Lecocq, Sebastien & Visser, Michael, 1997. "Estimation for a Hedonic Price Equation for Bordeaux Wine: Does Quality Matter?," Economic Journal, Royal Economic Society, vol. 107(441), pages 390-402, March.
    4. Renneboog, Luc & Spaenjers, Christophe, 2012. "Hard assets: The returns on rare diamonds and gems," Finance Research Letters, Elsevier, vol. 9(4), pages 220-230.
    5. Luc Renneboog & Christophe Spaenjers, 2013. "Buying Beauty: On Prices and Returns in the Art Market," Management Science, INFORMS, vol. 59(1), pages 36-53, February.
    6. Debora L. Spar, 2006. "Markets: Continuity and Change in the International Diamond Market," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 195-208, Summer.
    7. Frank Scott & Aaron Yelowitz, 2010. "Pricing Anomalies In The Market For Diamonds: Evidence Of Conformist Behavior," Economic Inquiry, Western Economic Association International, vol. 48(2), pages 353-368, 04.
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