How do Illiquid Assets Improce Portfolio Performance? The Case of Bordeaux Wine.

Using a large sample of auctions results of prestigious Bordeaux wines, we provide an analysis of the price formation of wine through auctions sales. Estimating an hedonic price function, we identify the most relevant characteristics influencing the price of Bordeaux wines during auctions sales. The Repeat-Sale Regression (RSR) methodology is used to construct a wine index for the period January 1994-June 1997. We compare the evolution of wine price with several financial indices. We finally study the impact of an investment in wine on the risk-return characteristics of a diversified portfolio of a risk-averse investor.