Maturity-Matched Bond Fund Performance
43 Pages Posted: 2 Dec 2016 Last revised: 26 Mar 2019
Date Written: March 21, 2019
We uncover systematic errors in bond fund performance measures and show how to avoid them. Maturity-mismatch errors arise from the incorrect model assumption that interest rates change identically across maturities. By using the same passive benchmark for all funds, irrespective of their maturities, alphas are systematically either over- or underestimated, depending on funds’ maturity-mismatches and the concrete change of the form of the yield curve. Thus, alphas fail at measuring 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, persistence, low beta
JEL Classification: G20, G11, G23
Suggested Citation: Suggested Citation