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

Daniel Perez Liston (University of Texas‐Pan American, Edinburg, Texas, USA)
Gökçe Soydemir (University of Texas‐Pan American, Edinburg, Texas, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 31 August 2010

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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.

Keywords

Citation

Perez Liston, D. and Soydemir, G. (2010), "Faith‐based and sin portfolios: An empirical inquiry into norm‐neglect vs norm‐conforming investor behavior", Managerial Finance, Vol. 36 No. 10, pp. 876-885. https://doi.org/10.1108/03074351011070242

Publisher

:

Emerald Group Publishing Limited

Copyright © 2010, Emerald Group Publishing Limited

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