Maturity-Matched Bond Fund Performance
44 Pages Posted: 2 Dec 2016 Last revised: 10 Jul 2019
Date Written: July 8, 2019
We uncover systematic “maturity-mismatch errors” in the usual linear bond fund performance measures. By using for all funds the same passive benchmark, usually a broad medium maturity bond index, 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. Previous findings like performance persistence are partly driven by this mechanical error. 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