By Vice or Virtue: Does it Pay Off to Sin During Market Downturns?

Abstract: This paper investigates sin stock characteristics through relative return performance compared to the global market index MSCI World, defining stock defensiveness towards market movements (i.e. recession resistance) and abnormal amounts of excess returns. This was achieved by constructing a sin stock portfolio; SINDEX, containing stocks from the alcohol, tobacco, gambling, weapons and defence, fossil fuels and cannabis industries. For comparison, two additional portfolios were constructed, one consisting of SRI stock comparables; SRINDEX, the other consisting of “the most ethical companies'' based on Ethisphere’s list of honorees; SAINTDEX. Using five conventional capital asset pricing models in addition to the betting against beta factor, the characteristics of each portfolio is studied. Each model is estimated during the sample period between 1986 and 2021, as well as during five three-year recession periods. We find evidence that sin stocks provide both recession resistant and superior returns compared to the market. Majority of the time, sin industry sub-portfolios also provide superior returns over the market. However, sin stocks are found to underperform compared to their more virtuous and socially responsible alternatives when adjusting for assumed risk. Potentially reflecting a change in current investment attitude and behaviour.