Having Faith in Your Trade: Mutual Fund Risk-Taking and Local Religious Beliefs
We examine the relations between mutual fund risk-taking behaviors and local religious beliefs. We find that funds located in regions with lower Protestant population or higher Catholic population tend to have higher volatilities of fund returns, consistent with Protestants (Catholics) being more (less) risk-averse compared to general population. The variation in systematic risk exposures explains only a small portion of this difference as we observe a similar pattern in idiosyncratic portfolio risks. We also find that intra-year increases in fund volatility associated with tournament-like competition exist only in mutual funds located in areas with lower Protestant or higher Catholic population. After controlling for exposures to common risk factors, we find little evidence that higher return volatility is rewarded with higher returns. Funds located in lower Protestant population areas also appear to trade more frequently and have more positive return gaps. Overall, our findings suggest that the level of risk-taking by mutual fund managers varies reliably with local religious beliefs.
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