Yes, Indeed, Idiosyncratic Risk Matters to Socially Responsible Investments!

14 Pages Posted: 7 Nov 2010

See all articles by Huimin Li

Huimin Li

Griffith University - Griffith Business School

Adrian (Wai-kong) Cheung

Flinders University

Eduardo Roca

Griffith University

Date Written: November 6, 2010

Abstract

We provide empirical evidence regarding the effect of stock market regimes on Social Responsible Investment (SRI). Using the Markov Switching Model, we identify three market regimes for the study period between June 2001 and December 2009 in the US. These regimes are the low, medium, and high volatility states. We find a positive relationship between the idiosyncratic risk (i.e. unsystematic risk) and return during low and medium volatility states. However, this positive relationship tends to disappear during high volatility states. In addition, our analysis suggests that idiosyncratic risk has no forecasting power over SRI future returns. Overall, our findings imply that SRI investors are rewarded for bearing the additional SRI specific risk (idiosyncratic risk) when the market is less volatile. This reward, however, becomes uncertain during periods of high market volatility.

Keywords: Idiosyncratic Risk, Unsystematic Risk, Socially Responsible Investment, Stock Market Regimes

Suggested Citation

Li, Huimin and Cheung, Adrian and Roca, Eduardo, Yes, Indeed, Idiosyncratic Risk Matters to Socially Responsible Investments! (November 6, 2010). Available at SSRN: https://ssrn.com/abstract=1703750 or http://dx.doi.org/10.2139/ssrn.1703750

Huimin Li (Contact Author)

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia

Adrian Cheung

Flinders University ( email )

GPO Box 2100
Adelaide S.A. 5001, SA 5063
Australia
+618 8201 5831 (Phone)

Eduardo Roca

Griffith University ( email )

170 Kessels Road, Nathan
Queensland
Brisbane, 4111
Australia
(07) 373 57583 (Phone)

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