The Asset-Pricing Implications of Selection Neglect: Evidence from Global Fine Wine Auctions
We examine the asset-pricing implications of selection neglect – a failure to correct for censored information – in the fine wine market. Using a Markov Chain Monte Carlo model to account for the endogeneity of trading, we measure this bias as the difference between past observed and corrected returns. We find a strong negative relationship between our measure and future returns, which offers strong support for the sidelined investor hypothesis. This effect is mitigated by investor attention, amplified by ambiguity, and proves to be a shorter-term mispricing phenomenon, vulnerable to transaction and carrying costs.
Revisions requested for the Journal of Banking and Finance (2nd round)
Selected conferences: AWEA Annual Meeting (San Luis Obispo), University of Antwerp, University of Adelaide, Finance Forum, and University of Queensland
News coverage: Financial Times, HLN, and WineFi Podcast
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Algorithm Aversion, Appreciation, and Investor Return Beliefs (with Francesco Stradi)
Do investors trust AI analyst forecasts? Three incentivized experiments with 3,000 U.S. participants highlight that the average investor is less responsive to forecasts when AI is incorporated – suffering from algorithm aversion. The decrease in trust stems from a low perceived credibility. Interestingly, there are specific groups that exhibit algorithm appreciation, like sophisticated investors, those with higher AI literacy, and those identifying as politically progressive. Given AI's increasing role in financial markets, our results highlight the practical implications for improving trust in AI-generated forecasts.
Selected conferences: Sydney Banking and Financial Stability, 29th Annual New Zealand Colloquium, and Marketing-Finance Symposium (Maastricht University)
News coverage: 95bFM, The Conversation, Financial Times, InvestmentWeek, Radio New Zealand, Trends, ING, and Yahoo News
Video coverage: Ausbiz and TVNZ (Breakfast)
Climate Extrapolation and Relative Asset Pricing: Evidence from Bordeaux Premier Cru Wine Auctions
This paper offers evidence for climate extrapolation, a behavioral tendency where economic agents project salient local climate risks onto an asset’s valuation. Using a new dataset of over 68,000 Bordeaux Premier Cru auction prices from 222 houses across 17 countries, we highlight that greater relative climate attention in a foreign country leads to 3.58% lower relative prices for the identical bottle sold in the same month. This is consistent with the availability heuristic and is concentrated among wines of lower perceived quality (a concern for investors) and closer to the end of their drinking period (a concern for consumers). The findings cannot be explained by natural disasters, economic uncertainty, sentiment, selection bias, and granular lot-level differences in bottle conditions.
Selected conferences: AWBR (Adelaide), Burgundy School of Business, Deakin University, ESE Business School, and RMIT
News coverage: RNZ
Financial Regulation and Household Portfolio Reallocation: The Impact of the 1905 Dutch Lottery Ban (with Amaury de Vicq)
Do individuals adjust their investment portfolios when governments restrict gambling? We use hand-collected records of the Dutch inheritance tax to study portfolio reallocations following the 1905 Dutch Lottery Ban which exempted lottery bonds. We demonstrate that less (more) wealthy individuals significantly increased (decreased) allocations to lottery bonds after the ban. This substitution effect is weaker among the poorest, those with more readily available, legal gambling substitutes, and younger individuals. We formalize these empirical mechanisms in a life-cycle model with aspirational utility.
Selected conferences: Boulder Summer Conference on Financial Decision-Making, EHA Annual Meeting (Philadelphia), and WEIA (San Francisco)
We re-estimate the equity and corporate bond risk premium from 1850 to 1913 on the Brussels Stock Exchange, using a latent return model to address selection bias due to illiquidity. Corrected returns reveal that observed risk premium estimates were overstated, distorting portfolio choices and cross-sectional relationships. We find that investors underperformed portfolios based on corrected returns and that risk-return relationships break down once selection bias is addressed. The results provide an alternative view of the conventional wisdom on asset prices and could explain why returns on risky assets are considered higher in the pre-World War 1 period.
Non-Linear Dependence and Stock Return Expectations (with Koen Inghelbrecht, Daniël Linders, and Yong Xie)
We test the asset-pricing impact of non-linear dependence. In an experimental setting, we show that investors consider non-linear dependence in their portfolio selection decisions. Extending these laboratory results, we corroborate this relationship in the cross-section of U.S. stock returns. Importantly, this result remains even after controlling for the exposure to implied correlation. Overall, these findings are consistent with an increased demand for assets that provided hedging benefits during market downturns, suggesting that investors place a premium on non-linear dependence.
Selected conferences: Research in Behavioral Finance Conference (Amsterdam), Deakin University, Monash University, and FMA Asia/Pacific (Melbourne)
Volatility Laundering: On the Feasibility of Wine Investment Funds
Volatility laundering is the attempt to make the risks of investments appear lower than they are, potentially misleading investors and counterparties. I highlight that this is a very harmful phenomenon, particularly in undermining the feasibility of wine investment funds. If fund managers provide selection-corrected returns (free of volatility laundering) compared to biased returns, I argue there would likely be limited interest in wine investment fund structures. If managers apply the wrong returns to select wines, their potential losses can be larger than their gains.