Abnormal Returns in the Luxury Goods Industry

Abstract: The study aims to analyse a portfolio comprising of 19 stocks of companies in the luxury goods industry, the biggest market players classified as part of luxury industry by Bloomberg. The thesis analyses the portfolio from two vantage points, i.e. abnormal returns along with the explanations of them as well as its characteristics in comparison to the market. A long-short strategy is applied, where between April 2002 and December 2013 the investor holds a long position in the luxury portfolio and a short one in the market. The strategy has a positive average return, which can be explained by two models arrived at by a series of OLS regressions. Model I contains confidence of Chinese consumers, trading volume and book-to-market ratio. Model II contains confidence of Japanese consumers, year-on-year change in GDP of Russia, dividend yield and book-to-market. Additionally, the study shows that stocks from the luxury industry pay out less of their earnings to equity holders, and have a higher book-to-market value than the market, while there is no apparent difference in the earnings yield. Psychological factors such as investor sentiment may also have an effect on the stock returns.