Journal of Mathematics and Statistics

Markov Regime Switching Modelling and Analysis of Socially Responsible Investment Funds

Eduardo D. Roca, Victor S.H. Wong and Gurudeo Anand Tularam

DOI : 10.3844/jmssp.2011.302.313

Journal of Mathematics and Statistics

Volume 7, Issue 4

Pages 302-313


Problem statement: An increasing proportion of Australian superannuation funds are being placed in Socially Responsible Investments (SRI). Yet, there is no clarity in the literature as regards the risk and return characteristics of these investments and how their performance is affected by different states of the market and sector. Approach: We examine the sensitivity of Australian SRI Funds to movements of the US and Australian equity markets and SRI sectors under different market conditions through the application of Markov regime switching analysis. Results: We find that Australian SRI Funds are affected by movements in the US equity market and SRI sector during up and down market conditions. The Australian equity market also affects these funds but only during up market state. On the other hand, the Australian SRI sector does not have any significant effect on these funds. Conclusion: Australian SRI Funds are significantly driven by the US equity market and SRI sector and to a lesser extent, by the Australian equity market. The findings indicate that the returns of these funds are sensitive to market as well as sector movements and that Australian SRI Funds managers do not have market timing ability.


© 2011 Eduardo D. Roca, Victor S.H. Wong and Gurudeo Anand Tularam. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.