Fundamental Variables, Apt, and Bond Fund Performance
60 Pages Posted: 11 Nov 2008
Date Written: March 1995
In this paper, we develop relative pricing (APT) models that are successful in explaining expected returns in the bond market. We utilize indexes as well as unanticipated changes in economic variables as factors driving security returns. An innovation in this paper is the measurement of the economic factors as changes in forecasts. The return indexes are the most important variables in explaining the time series of returns. However, the addition of the economic variables leads to a large improvement in the explanation of expected returns. Furthermore, when we examine the percentage of expected returns explained by each of the variables, the economic variables are much more significant than all indexes with the exception of an aggregate index. We utilize our relative pricing models to examine the performance of bond funds. Bond funds underperform the returns predicted by the relative pricing models by the amount of expenses, on average.
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