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Are diamonds a safe haven?

Author

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  • Rita Laura D’Ecclesia

    (Università degli Studi di Roma ‘La Sapienza’)

  • Vera Jotanovic

    (Louvain Finance and CORE (Center for Research Operations and Econometrics))

Abstract

The diamond market has recently experienced important structural changes moving from a monopolistic market to a more liberalised and competitive one. As a result, diamonds are being discussed as a new investment asset class, with possible valuable portfolio contributions. The aim of this paper is to analyse their potential role within an investment framework, using previously unpublished data. We use the GemShares and NASDAQ OMX patented license and Polished Prices proprietary Price Reporting Agency (PRA) database to build our own standardized financial polished diamond basket indices (DBIs), using actual reported data of traded prices, adjusted for liquidity by traded volume. The impact of adjusting for traded volume of investment grade (only) diamonds is sufficient to develop a unique subset different to that captured and reported by the PRA. We first construct an index for High-Quality (HQ) and a second one for Medium-Quality (MQ) diamonds so we can study both of their dynamics and investment features. We further analyse the relationship the two indices have with major macroeconomic and financial variables, as well as other precious commodities to investigate their role as safe haven or hedge. We find that the DBIHQ Index returns are, on average, positively correlated with major macroeconomic variables—in particular with the Euro and Chinese Interest rates. The DBIMQ Index returns are largely uncorrelated with the same macroeconomic variables—with the exception of Euro Interest rates and the Israeli Exchange rate. When we compare our Diamond Indices returns with major financial variables and other precious commodities, we find a broad lack of correlation between their returns, and significant difference between the DBIHQ and DBIMQ Indices. We may conclude that diamonds are broadly a poor hedge for any of the portfolios we considered, with a few important exceptions—especially gold. Using Bauer and Lucey’s (Financ Rev 45(2):217–229. doi: 10.2139/ssrn.952289 , 2010) approach we further tested the “safe haven value” and “hedging usefulness” of the two Indices. In contrast with previous studies we believe the unique data we accessed allowed us to demonstrate that diamonds represent a strong hedge for gold investors, and in addition exhibit features of a safe haven for stock markets during periods of financial stress.

Suggested Citation

  • Rita Laura D’Ecclesia & Vera Jotanovic, 2018. "Are diamonds a safe haven?," Review of Managerial Science, Springer, vol. 12(4), pages 937-968, October.
    • Handle: RePEc:spr:rvmgts:v:12:y:2018:i:4:d:10.1007_s11846-017-0234-3
    DOI: 10.1007/s11846-017-0234-3
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    References listed on IDEAS

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    1. Chong, Terence T.L. & Lu, Chenxi & Chan, Wing Hong, 2012. "Long-range dependence in the international diamond market," Economics Letters, Elsevier, vol. 116(3), pages 401-403.
    2. Renneboog, Luc & Spaenjers, Christophe, 2012. "Hard assets: The returns on rare diamonds and gems," Finance Research Letters, Elsevier, vol. 9(4), pages 220-230.
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    8. Nicolas Vaillant & François-Charles Wolff, 2013. "Understanding Diamond Pricing Using Unconditional Quantile Regressions," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(11), pages 1540-1561, November.
    9. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    10. Low, Rand Kwong Yew & Yao, Yiran & Faff, Robert, 2016. "Diamonds vs. precious metals: What shines brightest in your investment portfolio?," International Review of Financial Analysis, Elsevier, vol. 43(C), pages 1-14.
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    Cited by:

    1. Guglielmo Maria Caporale & Luis A. Gil-Alana & Alex Plastun & Ahniia Havrylina, 2022. "Persistence in the Passion Investment Market," CESifo Working Paper Series 9586, CESifo.
    2. Vera Jotanovic & Rita Laura D’Ecclesia, 2019. "Do Diamond Stocks Shine Brighter than Diamonds?," JRFM, MDPI, vol. 12(2), pages 1-19, May.
    3. Jean Marcelin B. Brou & Mbodja Mougoué & Eugene Kouassi & Kebaabetswe Thulaganyo & Benjamin K. Acquah, 2022. "Effects of diamond price volatility on stock returns: Evidence from a developing economy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1025-1043, January.
    4. Potrykus, Marcin, 2022. "Diamond investments – Is the market free from multiple price bubbles?," International Review of Financial Analysis, Elsevier, vol. 83(C).
    5. Plastun, Alex & Bouri, Elie & Havrylina, Ahniia & Ji, Qiang, 2022. "Calendar anomalies in passion investments: Price patterns and profit opportunities," Research in International Business and Finance, Elsevier, vol. 61(C).

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