The Anomalies of SIN Stocks within Asia-Pacific : Based on the Evidence of CAPM and Fama-French Models
2020
This paper examines the existence of abnormal return (anomalies) in SIN stocks. As the focus of this study will be based on listed companies which businesses involved in producing alcohol, tobacco and gambling which is also known as “The Triumvirate” on multi sampling countries within the Asia-Pacific regions. Period of test compassing three different asset pricing models have been employed to measure the abnormal return in SIN stocks, namely CAPM, FF3FM and FF5FM. Factors are formed using the Fama and French (1993, 2015) “2x3” portfolios construction methodology. At the same time, based on certain evaluation criteria to select the best models among CAPM, FF3FM and FF5FM in assessing the performance of SIN companies. Ordinary Least Squared times-series regression has been carried out to examine the effectiveness of each model and being adjusted with Newey-West using 101 SIN stocks in Asia-Pacific regions, compassing the period from July 2009 to June 2019. The robustness of the models is tested separately in studying the viability of the asset pricing models in relevancy to SIN stocks. The viability test for the three models (CAPM, FF3FM and FF5FM) will be evaluated based on the traditional metric of the “Goodness-of-Fit” which is measured by adjusted R-squared and Gibson-Ross-Shaken Test (GRS) by Gibbsons, Ross and Shanken (1989). This paper shows that FF5FM has the highest explanatory power in explaining the variation return of the equally weighted SIN portfolios, with adjusted R-squared ranging from 32% to 98%. However, GRS test has rejected FF5FM in fully capturing the variation of SIN stocks return. Unexpectedly, the GRS test is in favour of FF3FM, as most of the sampling countries are able to capture the expected return of SIN stocks. Hence, proven that FF3FM is better than the traditional CAPM and FF5FM. Indicating that, there are less pricing errors in FF3FM as compared to the other two models and adjusted R-squared to be comparable to FF5FM. Empirical evidence in this study proves the viability of FF3FM in relevancy in measuring the performance of SIN stocks. Thus, results based on FF3FM in this paper find evidences of the existence of SIN anomalies in Australia, China and India. The findings provide new perspective on SIN stocks in the context of investment. Adding into the existing literature, in proving the SIN anomalies do hold in certain Asia-Pacific regions even though the cultural and ideology varies compared to most tested geographical region likewise the United States and Europe. With that, investors could determine whether the inclusion of SIN stocks is worthwhile to widen the spectrum of their portfolio in attaining excess return despite the business of SIN stocks which are going against the social norm. In other words, it can be said that investors would change their attitude towards SIN stocks by holding it while other investors shunning away from it and thereby, earning abnormal returns as a compensation of risk attained.
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