The Effect of the Business Cycle on the Performance of Socially Responsible Equity Mutual Funds

• Activity Number: 360
• Type: Contributed
• Date/Time: Tuesday, August 2, 2011 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Andrea Roofe*+
• Companies: Florida International University
• Keywords: switching regression ; business cycle ; finance ; mutual fund ; ecomometrics ; recession

Abstract

The paper applies the switching regression originally proposed by Goldfeld & Quandt (1973) to examine the behavior of a sample of 10 socially responsible equity mutual funds during the expansion and contraction phases of US business cycles between July 1991 and June 2009, the end of what is often called The Great Recession, using monthly data. The information on business cycles was tracked using the dividend yield. Fund returns were less volatile during an expansion than during a period of contraction, as indicated by the standard deviation of returns. The Carhart 4-factor model explained 70% of the variability in fund excess returns. During an economic expansion, fund excess returns were explained by the differential between high and low ratios of book to market value (HML) and market excess returns. During an economic contraction, fund excess returns were explained by the differential between small and big firms (SMB), momentum, and market excess returns.