Maturity-Matched Bond Fund Performance

37 Pages Posted: 2 Dec 2016 Last revised: 8 Jul 2020

See all articles by Markus Natter

Markus Natter

University of Augsburg

Martin Rohleder

University of Augsburg

Marco Wilkens

University of Augsburg

Date Written: July 8, 2020

Abstract

We discover systematic maturity-mismatch errors in bond fund alphas, which originate from using linear regressions despite the known nonlinearity between interest rate risk and expected returns. During our sample period, this has led on average to an overestimation of performance.
We also show that popular fund ratings and investor flows are influenced by this error. Our simple and practical remedy for the problem is to individually match funds and indices using their durations, thereby immunizing alpha to interest rate changes. If the fund’s duration is unknown, we identify beta and R2 as candidates for alternative matchings.

Keywords: Bond funds, performance, maturity mismatch, yield curve, interest rate risk

JEL Classification: G20, G11, G23

Suggested Citation

Natter, Markus and Rohleder, Martin and Wilkens, Marco, Maturity-Matched Bond Fund Performance (July 8, 2020). Available at SSRN: https://ssrn.com/abstract=2877630 or http://dx.doi.org/10.2139/ssrn.2877630

Markus Natter

University of Augsburg ( email )

Universitaetsstrasse 16
Augsburg, 86159
Germany
+49 821 598 4497 (Phone)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/mitarbeiter/natter_markus/

Martin Rohleder (Contact Author)

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4120 (Phone)

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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