Can You Cash In on Sin? An Analysis of Sin Stock Performance in Developed Markets

Abstract

This thesis addresses the debate in the literature regarding the existence of a sin premium in equity markets. Focusing on three categories of sin stocks- alcohol, tobacco and gambling- we analayse data from global developed markets spanning the period 2000 to 2023. Using monthly returns, we construct value-weighted portfolios of sin stocks and comparable non-sin stocks. Through regression analyses, we evaluate the risk-adjusted performance of these portfolios using the Fama-French three-factor model, the Carhart four-factor model, and the Fama-French five-factor model, both with and without momentum. To assess whether a sin premium exist and if it can be attributed to the unique characteristics of the sin stocks, we estimate and analyse alphas through a dual approach: (i) the excess return of the sin portfolio (RSin − Rf), and (ii) a long-short strategy by going long in the sin portfolio and short in the comparable portfolio (RSin −RComp). Our findings reveal no significant alphas, indicating that the excess returns of sin stocks can largely be explained by conventional risk factors rather than a sin effect. These results challenges the notion of a distinct sin premium and emphasize the efficiency of modern equity markets- reminding investors that even the most controversial assets rarely escape the fundamental tenets of rational pricing.