Minimum Maturity Rules: The Cost of Selling Bonds Before Their Time

41 Pages Posted: 22 Oct 2011

See all articles by Darrin DeCosta

Darrin DeCosta

Accretive Asset Management LLC

Fei Leng

University of Washington, Tacoma

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business

Date Written: October 14, 2011

Abstract

We show that the performance of traditional fixed income index funds is being negatively impacted by minimum maturity rules established by the indices that these funds seek to replicate. Bonds removed from the index because of minimum maturity rules underperform a matched sample in the two month period surrounding their removal. A portfolio consisting of the fixed income fund and bonds previously removed from the fund by operation of the minimum maturity rule outperforms the fund itself on a risk-adjusted basis. We demonstrate that the relaxation of the minimum maturity index rule could result in improved performance for a highly popular index-based fixed income ETF.

Keywords: Bond Index, Fixed Income Index Funds, Fixed Income ETFs, Index Construction Rules

Suggested Citation

DeCosta, Darrin and Leng, Fei and Noronha, Gregory, Minimum Maturity Rules: The Cost of Selling Bonds Before Their Time (October 14, 2011). Available at SSRN: https://ssrn.com/abstract=1944256 or http://dx.doi.org/10.2139/ssrn.1944256

Darrin DeCosta (Contact Author)

Accretive Asset Management LLC ( email )

55 South Main Street
Suite 337
Naperville, IL 60540
United States

HOME PAGE: http://www.bulletshares.com

Fei Leng

University of Washington, Tacoma ( email )

1900 Commerce Street
Tacoma, WA 98402-3100
United States

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business ( email )

1900 Commerce Street
Campus Box 358420
Tacoma, WA 98402-3100
United States

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