Practical Applications of Is It Good to Sin When Times Are Bad? An Investigation of the Defensive Nature of Sin Stocks

In Is It Good to Sin When Times Are Bad? An Investigation of the Defensive Nature of Sin Stocks from the October 2020 issue of The Journal of Investing, author Greg Richey (of the University of California at Riverside) examines a variety of so-called sin industries, individually and altogether, to evaluate their resistance to downside risk as compared with the S&P 500 Index. Using an EGARCH model, Richey is able to show that negative market shocks, or “bad news events,” have a less negative impact on sin stock returns than do positive market shocks, or “good news events.” Using the VIX (also known as the fear index) for stock market volatility, he also indicates that VIX increases lead to delayed increases in anticipated volatilities for a mixed portfolio of various sin stocks. Overall, this makes sin stocks seem like a wise defensive choice for resisting negative shocks. TOPICS: Portfolio theory, portfolio construction, ESG investing