Maturity-Matched Bond Fund Performance
46 Pages Posted: 2 Dec 2016 Last revised: 11 Jan 2020
Date Written: January 10, 2020
We uncover systematic maturity-mismatch errors in the usual linear bond fund performance measures. By measuring the interest rate risk of each fund against the same passive benchmark, usually a broad, medium-maturity index, bond fund alphas are systematically over- or underestimated, depending on funds’ maturity-mismatches with the benchmark and on external changes of the yield curve. Thus, alphas fail at measuring funds’ internal management performance correctly. To consider funds’ maturities to avoid this error, we use individual maturity-matched benchmarks and show that this approach effectively eliminates these maturity-mismatch errors in bond fund alphas.
Keywords: Bond funds, performance, maturity mismatch, yield curve, interest rate risk
JEL Classification: G20, G11, G23
Suggested Citation: Suggested Citation