Reaching for Yield in Corporate Bond Mutual Funds

The Review of Financial Studies (2017)

53 Pages Posted: 20 Nov 2014 Last revised: 18 Apr 2018

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance

Mathias Kronlund

University of Illinois at Urbana-Champaign

Date Written: November 1, 2017

Abstract

We examine "reaching for yield" in U.S. corporate bond mutual funds. We define reaching for yield as tilting portfolios toward bonds with yields higher than the benchmarks. We find that funds generate higher returns and attract more inflows when they reach for yield, especially in periods of low-interest rates. Returns for high reaching-for-yield funds nevertheless tend to be negative on a risk-adjusted basis. Funds engage in rank-chasing behavior by reaching for yield, although these incentives are moderated by the illiquid nature of corporate bonds. High reaching-for-yield funds hold less cash and less liquid bonds, exacerbating redemption risks.

Keywords: Reaching for yield, risk taking, corporate bonds, mutual funds, investment grade, high yield

JEL Classification: E44, G23, G28

Suggested Citation

Choi, Jaewon and Kronlund, Mathias, Reaching for Yield in Corporate Bond Mutual Funds (November 1, 2017). The Review of Financial Studies (2017). Available at SSRN: https://ssrn.com/abstract=2527682 or http://dx.doi.org/10.2139/ssrn.2527682

Jaewon Choi (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Mathias Kronlund

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
449
rank
61,792
Abstract Views
2,245
PlumX Metrics