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Diamonds — A precious new asset?

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  • Auer, Benjamin R.
  • Schuhmacher, Frank

Abstract

During the recent turbulences in the world's financial markets, diamond companies have started advertising diamonds as a new asset that can hedge against market volatility and be a valuable portfolio component. To put this claim to the test, this article investigates (i) the performance of investments in diamonds of different quality grades, (ii) time-varying correlations between the returns on diamonds and traditional asset classes and (iii) the role of diamonds as a potential diversifier in a world market portfolio. Our results, based on monthly PolishedPrices diamond index data for the years 2002 to 2012, show that in this crisis-ridden period, an investment in a diversified diamond portfolio has outperformed a diversified stock market investment. Additionally, evidence on low time-varying correlations to traditional asset classes highlights that diamonds offer some diversification potential. However, further analysis shows that diamonds can only generate economically significant value in a world market portfolio (by either reducing risk or increasing mean return) when rather high diamond proportions are included in the portfolio.

Suggested Citation

  • Auer, Benjamin R. & Schuhmacher, Frank, 2013. "Diamonds — A precious new asset?," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 182-189.
    • Handle: RePEc:eee:finana:v:28:y:2013:i:c:p:182-189
    DOI: 10.1016/j.irfa.2013.03.008
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    8. Auer, Benjamin R., 2016. "On the performance of simple trading rules derived from the fractal dynamics of gold and silver price fluctuations," Finance Research Letters, Elsevier, vol. 16(C), pages 255-267.
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    More about this item

    Keywords

    Diamonds; Performance; Correlation; Diversification; World market portfolio;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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