The Returns on Investment Grade Diamonds

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages33
Volume2013-025
Publication statusPublished - 2013

Publication series

NameCentER Discussion Paper
Volume2013-025

Fingerprint

Diamond
Return on investment
Government bonds
Sharpe ratio
Investors
Auctions
Equity
Corporate bonds
Risk-return tradeoff
Regression method
Hedonic regression
Risk-return
Diversification
Reward
Inflation
Real estate
Equity markets
European stock markets

Keywords

  • auctions
  • diamonds
  • gems
  • hedonic regressions
  • luxury goods
  • alternative investments

Cite this

Renneboog, L. D. R. (2013). The Returns on Investment Grade Diamonds. (CentER Discussion Paper; Vol. 2013-025). Tilburg: Finance.
Renneboog, L.D.R. / The Returns on Investment Grade Diamonds. Tilburg : Finance, 2013. (CentER Discussion Paper).
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Renneboog, LDR 2013 'The Returns on Investment Grade Diamonds' CentER Discussion Paper, vol. 2013-025, Finance, Tilburg.

The Returns on Investment Grade Diamonds. / Renneboog, L.D.R.

Tilburg : Finance, 2013. (CentER Discussion Paper; Vol. 2013-025).

Research output: Working paperDiscussion paperOther research output

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AB - 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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Renneboog LDR. The Returns on Investment Grade Diamonds. Tilburg: Finance. 2013. (CentER Discussion Paper).