Do Socially Responsible Mutual Funds Outperform Non-Socially Responsible Mutual Funds under A Regime-Switching Model?

Abstract

In this thesis, the regime dependent mean and abnormal returns are studied to examine whether socially responsible mutual funds have a different performance from traditional mutual funds, since there may be different patterns in the economy. Five economic factors - stock returns, treasury yield spread, credit spread, economic confidence and building permits - are used to identify the market regimes, which are determined as bear and bull markets. The regime-dependent abnormal returns are calculated with a regime-switching Fama & French three factor asset-pricing model. The empirical results show that socially responsible mutual funds have statistically higher mean return than non-socially responsible mutual funds in both bear and bull markets. However, using the measurement of the abnormal returns, socially responsible mutual funds statistically underperform non-socially responsible mutual funds in bull market, while the performance of the two types of funds are not statistically differentiable in the bear market.