Article: Ethical Fund Volatility and Inconsistency of Investor Sentiment Journal: Journal of Business and Management (JBM) 2022 Vol.28 No.1 pp.1 - 29 Abstract: Purpose - This paper examines the volatility patterns and risk-adjusted performance of ethical funds compared to conventional benchmarks across an entire business cycle, including the global financial crisis. The focus on risk coincides within the context of investor sentiment and the investment community's relative attachment to ethical funds. Investor sentiment affects the fund flow of ethical funds and shifts the role and function of ethical funds in the eyes of investors. Method - The sample comprises 1,397 regionally based ethical funds from the U.S., European, and Asia-Pacific markets and globally oriented funds. The study examines changes in volatility patterns before, during, and after the 2008 global financial crisis. The authors employ the exponential generalized autoregressive conditional heteroskedastic (EGARCH) model to compute fund volatility and use the wavelet method to assess changes in investor sentiment. Findings - The study finds that ethical equity funds offer significantly lower downside risk than equity benchmarks before and during the global financial crisis. These periods coincide with investor sentiment patterns where investors regard ethical funds as a shelter for risk. After the global financial crisis, a shift occurs in volatility patterns where ethical funds generate greater risk than their respective equity benchmarks. These new volatility patterns coincide with changes in investor sentiment, suggesting that changes in market volatility reflect rational adjustments to investor sentiment. Limitations - The study spans an entire business cycle and includes a global financial crisis. Multiple cycles may provide additional insight into the evolving volatility behavior of ethical funds. Implications - The study provides evidence into the evolving status of ethical funds. The growing acceptance and popularity of such funds coincide with significantly greater cash inflows into the funds, which may continue to impact the volatility behavior of such assets. Furthermore, the growing worldwide attraction and acceptance of ethical funds may generate sufficient cash inflows so that these funds behave the same way as non-ethical funds in the future. Originality - The study fills the ethical fund volatility research gap that focuses mainly on returns. This study proposes a fund volatility cycle that begins as premium assets with limited capital inflows and ends as commonly accepted assets with abundant capital inflow. To the best of the authors' knowledge, this is the first study to focus on the volatility patterns of ethical funds across a business cycle while incorporating changes in investor sentiment analyzed from a frequency domain perspective. In addition, this study uses a significantly larger sample of ethical funds than most studies of ethical funds, so its analysis spans major international markets to obtain regional variation and differences in systematic risk exposure. Inderscience Publishers - linking academia, business and industry through research

Title: Ethical Fund Volatility and Inconsistency of Investor Sentiment

Authors: Gary A. Patterson; Wei Guan; Huijian Dong

Addresses: Author address listing can be found in the "About the Authors" section at the end of the article.

Abstract: Purpose - This paper examines the volatility patterns and risk-adjusted performance of ethical funds compared to conventional benchmarks across an entire business cycle, including the global financial crisis. The focus on risk coincides within the context of investor sentiment and the investment community's relative attachment to ethical funds. Investor sentiment affects the fund flow of ethical funds and shifts the role and function of ethical funds in the eyes of investors. Method - The sample comprises 1,397 regionally based ethical funds from the U.S., European, and Asia-Pacific markets and globally oriented funds. The study examines changes in volatility patterns before, during, and after the 2008 global financial crisis. The authors employ the exponential generalized autoregressive conditional heteroskedastic (EGARCH) model to compute fund volatility and use the wavelet method to assess changes in investor sentiment. Findings - The study finds that ethical equity funds offer significantly lower downside risk than equity benchmarks before and during the global financial crisis. These periods coincide with investor sentiment patterns where investors regard ethical funds as a shelter for risk. After the global financial crisis, a shift occurs in volatility patterns where ethical funds generate greater risk than their respective equity benchmarks. These new volatility patterns coincide with changes in investor sentiment, suggesting that changes in market volatility reflect rational adjustments to investor sentiment. Limitations - The study spans an entire business cycle and includes a global financial crisis. Multiple cycles may provide additional insight into the evolving volatility behavior of ethical funds. Implications - The study provides evidence into the evolving status of ethical funds. The growing acceptance and popularity of such funds coincide with significantly greater cash inflows into the funds, which may continue to impact the volatility behavior of such assets. Furthermore, the growing worldwide attraction and acceptance of ethical funds may generate sufficient cash inflows so that these funds behave the same way as non-ethical funds in the future. Originality - The study fills the ethical fund volatility research gap that focuses mainly on returns. This study proposes a fund volatility cycle that begins as premium assets with limited capital inflows and ends as commonly accepted assets with abundant capital inflow. To the best of the authors' knowledge, this is the first study to focus on the volatility patterns of ethical funds across a business cycle while incorporating changes in investor sentiment analyzed from a frequency domain perspective. In addition, this study uses a significantly larger sample of ethical funds than most studies of ethical funds, so its analysis spans major international markets to obtain regional variation and differences in systematic risk exposure.

Keywords: Ethical funds; volatility; performance; crisis; sentiment.

DOI: 10.1504/JBM.2022.141293

Journal of Business and Management, 2022 Vol.28 No.1, pp.1 - 29

Published online: 05 Sep 2024 *

Title: Ethical Fund Volatility and Inconsistency of Investor Sentiment

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