Yes, indeed, idiosyncratic risk matters for socially responsible investments!

Huimin Li, Adrian Cheung, Eduardo Roca

Research output: Contribution to journalArticle

2 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)63-74
Number of pages12
JournalInternational Research Journal of Finance and Economics
Volume54
Publication statusPublished - Nov 2010

Keywords

  • Idiosyncratic risk
  • Socially responsible investment
  • Stock market regimes
  • Unsystematic risk

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