Sin Stock Trading Strategies: Evidence from Beverage, Food and Tobacco Sector in Colombo Stock Exchange, Sri Lanka

Sin stocks are expected to yield high returns and many scholars have tested whether sin stocks would generate positive significant premiums by employing various asset pricing models such as capital asset pricing model and its multi-factor versions. This study has employed the Fama -French five-factor asset pricing model to test two trading strategies using sin stocks. One is taking a long position in sin stocks only. Another is the long-short strategy between sin and non-sin stocks. Thirteen stock portfolios have been created to test the above two strategies based on the industry and firm size where the latter is measured by the market capitalization. Both trading strategies have generated mixed results but not significant alphas for a single trading strategy at least. These findings imply that the formation of trading strategies using sin stocks will not yield positive results in the Sri Lankan context. However, this study has the limitations of the existence of a handful number of sin stocks only in the Beverage, Food, and Tobacco sector in Sri Lanka's single stock exchange and the impact of the crisis in Sri Lanka on capital markets during the study period.