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Faith-based and sin portfolios: An empirical inquiry into norm-neglect vs norm-conforming investor behavior

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  • Daniel Perez Liston
  • Gökçe Soydemir
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    Abstract

    Purpose – The purpose of this paper is to investigate relative portfolio performance between sin stock returns and faith-based returns. Design/methodology/approach – Similar to Hong and Kacperczyk, Jensen's alpha was utilized to conduct tests along with three asset-pricing models and rolling regression technique to reveal that faith-based and sin betas move in opposite directions during most of the sample period. Findings – Norm-neglect was found, in that Jensen's alpha is positive and significant for the sin portfolio. Further, evidence in favor of norm-conforming investor behavior was found, where Jensen's alpha is negative and significant for the faith-based portfolio. These findings provide evidence that the sin portfolio outperforms the faith-based portfolio relative to the market. A rolling regression technique reveals that faith-based and sin betas tend to move in opposite directions during most of the sample period. The evidence suggests that faith-based beta has an average estimated beta of one, mimicking the market. The sin portfolio, however, has an average estimated beta of one-half. Finally, the reward-to-risk measure, Sharpe ratio, is statistically higher for the sin portfolio relative to the faith-based portfolio. Originality/value – This paper contributes to the literature in the following distinct ways. First, three asset-pricing models are estimated to examine Jensen's alpha for sin and faith-based portfolios. Second, a rolling regression procedure is used to examine the dynamic behavior relative to the market of the sin and faith-based portfolios. Third, use is made of the Jobson and Korkie test, which allows for statistical comparisons of Sharpe ratios. Lastly, daily instead of monthly data and a different sample period are used to examine the research questions posed in this study.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 36 (2010)
    Issue (Month): 10 (October)
    Pages: 876-885

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    Handle: RePEc:eme:mfipps:v:36:y:2010:i:10:p:876-885

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    Web page: http://www.emeraldinsight.com

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    Related research

    Keywords: Asset valuation; Financial management; Investors; Portfolio investment;

    References

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    1. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    2. Emil Boasson & Vigdis Boasson & Joseph Cheng, 2006. "Investment principles and strategies of faith-based funds," Managerial Finance, Emerald Group Publishing, vol. 32(10), pages 837-845.
    3. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    4. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    5. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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    Cited by:
    1. Durand, Robert B. & Koh, SzeKee & Limkriangkrai, Manapon, 2013. "Saints versus Sinners. Does morality matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 166-183.

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