XXVI Edition

14-15-16 December 2017"

Pricing Sin Stocks: Ethical Preference vs. Risk Aversion

Colonnello Stefano, IWH & OvGU
Curatola Giuliano, Goethe University
Gioffré Alessandro, Goethe University

We develop a model that reproduces the return and volatility spread between sin and non-sin stocks. We endow agents preferences with a sensitivity factor to firms ethicalness. A positive marginal rate of substitution between dividends and ethicalness generates higher return and volatility for sin stocks. This result can be obtained either when (i) dividends and ethicalness are substitutes and investors are less risk-averse than log utility, or (ii) when dividends and ethicalness are complements and investors are more risk-averse than log utility. We show that only the latter case is consistent with the observed patterns of conditional return and volatility.

Area: Asset Pricing and Derivatives

Keywords: Asset Pricing, General Equilibrium, Sin Stocks

Paper file

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