Dow Jones Tobacco vs. DJI: Portfolio VaR Analysis 2007–2010
This paper presents a six-part quantitative analysis comparing the Dow Jones Industrial Average (DJI) and the Dow Jones U.S. Tobacco Index (DJUSTB) over the period January 2007 to January 2010 — a span encompassing the Great Recession. Using daily return data (752 observations per index), the study constructs six discrete portfolio weightings, calculates Value at Risk (VaR) at the 95% confidence interval, and computes correlation coefficients across multiple sub-periods. The analysis finds that the tobacco index consistently outperformed the broader market, attributing this to the low price and income elasticity of tobacco demand, the 2009 federal cigarette tax hike, and the relative weakness of the U.S. dollar against foreign currencies. The paper concludes with recommendations for further research relevant to public health policy.
- Data Selection: Justifications and Discussion: Macro backdrop, index choices, and elasticity rationale
- Portfolio Analysis for Six Discrete Weight Combinations: Six weighted portfolio returns and risks compared
- VaR Compared to Actual Returns: 95% VaR versus actual $100M portfolio returns
- Overall Correlation Coefficient: Positive correlation between DJI and DJUSTB
- Correlation Coefficient Comparison Across Sub-Periods: Diverging correlations signal tobacco's independent growth
- VaR Calculations over Different Sub-Periods: Tax hike and currency effects on sub-period VaR
- Conclusion: Dollar weakness and developing markets drive tobacco gains
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What makes this paper effective
- Integrates quantitative financial metrics (VaR, standard deviation, correlation coefficients) with macroeconomic narrative, giving each statistical result meaningful real-world context.
- Structures the analysis in clearly labeled, sequential steps, making the methodology transparent and easy to follow for readers unfamiliar with portfolio modeling.
- Grounds empirical findings in established economic theory — particularly price and income elasticity of demand — and cites peer-reviewed literature to support interpretive claims.
Key academic technique demonstrated
The paper exemplifies sub-period analysis as a diagnostic tool: by splitting the 2007–2010 dataset into two sub-periods and recalculating both correlation coefficients and VaR for each, the author isolates the divergent effects of the 2009 federal tobacco tax hike and post-recession dollar weakness. This technique shows how aggregate statistics can mask important structural breaks in financial data.
Structure breakdown
The paper follows a six-part empirical structure. Part One justifies data selection and provides macroeconomic background. Part Two constructs six portfolio weightings and identifies the dominant portfolio. Part Three introduces the VaR framework and compares it to actual returns. Part Four computes the overall correlation coefficient. Part Five disaggregates correlation by sub-period to identify divergence. Part Six recalculates VaR for the 2009–2010 sub-period and explains the tobacco index's outperformance via the tax hike and currency dynamics. A conclusion synthesizes findings and gestures toward public health policy implications.
Data Selection: Justifications and Discussion
Two separate major U.S. indexes were evaluated over a period extending from the beginning of 2007 to the beginning of 2010. The Dow Jones Industrial Average was selected as a broad indicator of overall U.S. economic health, while a more specific indicator — the Dow Jones U.S. Tobacco Index — was also selected to represent a more targeted industry analysis. Six phases of calculation were conducted and contrasted with various macroeconomic trends prevalent throughout this period. This provided evidence that the Dow Jones U.S. Tobacco Index was composed of companies that sold goods with a low price elasticity of demand, low income elasticity, or possibly some combination of both. Furthermore, a discussion was included recommending that future research be conducted over this period to further delineate factors and information that could potentially be used for future public health policy.
The macroeconomic environment from the beginning of 2007 to the beginning of 2010 is an interesting period to study. While the National Bureau of Economic Research (NBER) officially declared that the U.S. entered into a recessionary period in December of 2007, the economy as a whole showed signs of stress long before this date (MSNBC, 2008). The NBER later declared that the recession officially ended in June of 2009 (Isidore, 2010). However, considering only the official beginning and end dates paints only a small portion of the total picture. In fact, since the official end date passed, America saw a deterioration of over nine hundred thousand jobs as well as the slowest growth in the nine-month stretch following a post-war downturn (The Economist, 2010).
Unemployment rates at the beginning of the period being studied approximated about seven million people in the U.S., and the unemployment rate was under five percent (Bureau of Labor Statistics, 2007). By the end of the period being studied, unemployment had risen to ten percent and then dropped slightly to nine point seven percent (Hincha-Ownby, 2010). Both the unemployment rate and the total number of people unemployed more than doubled. Many economists believe that the high levels of unemployment created demand-side problems that will never be overcome by supply-side initiatives (Krugman, 2011). One factor that underlined many of the subsequent problems the U.S. economy faced during this time was the housing bubble peak, which was estimated to have occurred in 2005 (Byun, 2010). This phenomenon resulted in a subsequent unemployment effect estimated to range from 1.2 million to 1.7 million jobs, and cost U.S. homeowners billions in lost real estate wealth.
Index pricing data was selected for the period extending from January 1st, 2007 to January 1st, 2010. The first index chosen was the Dow Jones Industrial Average (DJI). The DJI represents a fairly broad economic indicator. It is composed of thirty stocks and is price-weighted among the largest blue-chip organizations traded on the New York Stock Exchange (NYSE) (Abbondante, 2010). While other indexes — such as the S&P 500 and the NASDAQ — contain a compilation of stocks, the DJI has been a widely recognized and reliable indicator of overall U.S. economic health. It should also be noted, however, that a small number of critics argue that since the companies included in the index are limited and subject to frequent changes, it may not be quite as reliable as most people are led to believe (Blodget, 2009).
An index representing a narrower industry segment was also chosen for analysis. Since the macroeconomic environment at the time represents a period fraught with volatility and uncertainty — including some considerations of systemic risk — the Dow Jones U.S. Tobacco Index seemed like an interesting secondary selection. Though the main stream press reports little on this industry index, a tremendous body of literature has been developed in journals over the last three decades concerning the price and income elasticity of tobacco products (Chaloupka, 2011). For example, in the late 1960s, researchers identified the price elasticity established by previous studies to range from -0.10 to -1.48 (Lyon & Simon, 1968).
Tobacco can serve as a classic example for the price elasticity of demand as well as income elasticity, since data are readily available both before and after state and federal tax policies have been implemented. Both the federal government and a majority of state governments have issued tax policies that have subsequently increased the purchase price for all consumers at given intervals (Tanzi & Zee, 2000). Although there appears to be a relative consensus that demand undoubtedly diminishes under such policy initiatives, the extent to which it does is highly contested. New models consider not only the basic underlying economic data — such as information on price and income levels — but also attempt to connect macro-social influences, such as various marketing campaigns, to the total body of knowledge (Chaloupka, 2011).
Daily frequency data were chosen to provide an accurate dataset with which to analyze each index, given the heavy volatility that occurred in markets throughout this period. Each dataset for the individual indices therefore consisted of 752 data points. Two potential macroeconomic influences were hypothesized to potentially affect the narrower industry-focused index: either the index would experience diminished returns due to the effects of an effective reduction of income in the economy, or the resulting recession would have no effect due to the marginal rate of tobacco's income elasticity. The data suggested that, on the whole, the tobacco index outperformed the broader market during this period.
| (^DJI) | (^DJUSTB) | |
|---|---|---|
| Mean | -0.0002386 | 7.20632E-05 |
| Std. Dev. | 0.017249966 | 0.015367525 |
| Variance | 0.000297561 | 0.000236161 |
Table 1 — Descriptive Statistics
Works Cited
Abbondante, P. (2010). Trading volume and stock indices: A test of technical analysis. American Journal of Economics and Business Administration, 2(3), 287–292.
Blodget, H. (2009). How Dow Jones wrecked the Dow Jones Industrial Average. Business Insider. Retrieved September 14, 2011.
Bureau of Labor Statistics. (2007). United States Department of Labor. Retrieved September 16, 2011, from http://www.bls.gov/opub/ted/2007/feb/wk1/art02.htm
Byun, K. (2010). The U.S. housing bubble and bust: Impacts on employment. Bureau of Labor Statistics. Retrieved September 16, 2011, from http://www.bls.gov/opub/mlr/2010/12/art1full.pdf
Chaloupka, F. (2011). Macro-social influences: The effects of prices and tobacco-control policies on the demand for tobacco products. Oxford Journals, 1(2), 100–106.
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Hincha-Ownby, M. (2010). Unemployment rate drops to 9.7% in January 2010. Retrieved September 16, 2011.
Isidore, C. (2010). Recession officially ended in June 2009. CNN Money. Retrieved September 15, 2011.
Kock, W. (2009). Biggest U.S. tax hike on tobacco takes effect. USA Today. Retrieved September 22, 2011.
Krugman, P. (2011). The war on demand. The New York Times. Retrieved September 16, 2011.
Lyon, H., & Simon, J. (1968). Price elasticity of the demand for cigarettes in the United States. American Journal of Agricultural Economics, 50(4), 888–895.
MSNBC. (2008). It's official: U.S. is in recession. Retrieved September 15, 2011.
Palos, R. (2009). Overview: The tobacco lobby goes global. Public Integrity. Retrieved September 22, 2011.
Tanzi, V., & Zee, H. (2000). Tax policy for emerging markets: Developing markets. National Tax Journal, 53(2), 299–322.
The Economist. (2010). When did it end? Retrieved September 15, 2011.
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