Analysis of Resilience of Sin Stocks to Economic Downturns and Investor Sentiment Shocks

Investors agree that sin stocks represent an attractive investment due to their resilience during economic downturns, mainly due to the inelastic demand for their products regardless of economic conditions. These characteristics not only provide a defensive strategy in volatile markets, but also lead to high returns, which attracts increased attention during periods of market volatility. However, existing academic research often treats sin stocks in a homogeneous manner, failing to consider the differences between sin industries, each of which is associated with distinctive consumer behaviour and market dynamics. This omission highlights the need for more nuanced analyses to identify differences in sin industry patterns. The objective of this study is to compare different sin stock industries with a focus on their resilience during economic downturns and response to investor sentiment shocks. The paper used aggregate data of monthly returns of sin stock industries for 20 years: from 06.2004 to 12.2023 taken from Refinitiv. Control factors were collected from FRED, AAII and Kenneth French's website databases. Multiple linear regression, ARDL and partial adjustment model (PAM) methods were applied, which are suitable for analysing mixed frequency data over time. In addition, robustness analysis was conducted to check the integrity and reliability of the findings. The results of the study show that the casino and gambling sector is the least resilient during economic downturns, while alcohol and tobacco stocks show greater resilience. Furthermore, the analysis shows that while high ESG-rated stocks perform better than casino stocks, they are less resilient compared to the alcohol and tobacco sector. This information allows investors to better tailor their investment strategies to their risk tolerance, potentially increasing investments in tobacco and alcohol stocks to increase stability during a recession.