| Summary: | We investigate the performance of US mutual funds that employ different ethical criteria: religious, socially responsible, and irresponsible. Performance is evaluated over different market regimes using a Markov-switching conditional CAPM approach that endogenously defines different states of the market. This model is also extended to a multifactor context. The results show that estimates of performance vary across different market regimes. The Vice Fund, which invests in unethical firms, outperforms in low-volatility regimes, but underperforms in high-volatility regimes. These results contradict the Vice Fund’s claim that it constitutes a “solid investment during recessionary periods”. Our results show that socially responsible and morally responsible funds exhibit different performance across different market conditions, thereby supporting the use of performance evaluation models that take into account different market regimes. Overall, different types of ethical screens seem to lead to different performance patterns across different market regimes.
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