Dynamic Analysis between Sin Stocks and Investor Sentiment

Abstract

This paper examines the temporal relationship between sin stocks and investor sentiment using vector autoregressive models. It decomposes sin returns into a market-based and pure sin component and then performs dynamic statistical modeling on the pure sin portfolio. Next, it attempts to determine the channel (rational or irrational) through which individual (institutional) investor sentiment impacts pure sin returns. This study finds that shocks to both individual and institutional rational-based sentiment positively influence pure sin returns for up to four months. However, irrational-based shocks have a positive, weaker and insignificant effect on pure sin returns. In addition, the results for the pure sin portfolio are compared to the S&P 500 and a comparables portfolio. The results show that sin stocks are less responsive than the S&P and the comparables portfolio to shocks in investor sentiment. In general, the results support the notion that dynamic analysis, coupled with investor sentiment are important factors for sin stock returns.

Keywords: Sin Stocks, Investor Sentiment, VAR

JEL Classification: G00, G02, G19