How Do Corporate Bond Investors Measure Performance? Evidence from Mutual Fund Flows

84 Pages Posted: 12 Dec 2019 Last revised: 18 Jul 2022

See all articles by Thuy Duong Dang

Thuy Duong Dang

Leibniz Universität Hannover

Fabian Hollstein

Saarland University

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Date Written: October 25, 2019

Abstract

Which factor model do investors in corporate bonds use? We examine this question by tracking investors' decisions to invest in actively managed corporate bond mutual funds with a revealed preference approach. Our main result is that \textit{all} bond factor models are dominated by the simple Sharpe ratio and Morningstar ratings. For all major corporate bond mutual fund styles, the Sharpe ratio explains fund flows better than alphas from bond factor models. Since the Sharpe ratio (and to some extent also Morningstar ratings) can be easily manipulated in bond markets, our findings have potentially severe implications for all market participants.

Keywords: Bond factor models, Sharpe ratio, bond mutual funds, investor flows, performance evaluation, flow--performance sensitivity

JEL Classification: G12, G11

Suggested Citation

Dang, Thuy Duong and Hollstein, Fabian and Prokopczuk, Marcel, How Do Corporate Bond Investors Measure Performance? Evidence from Mutual Fund Flows (October 25, 2019). Journal of Banking and Finance (2022), Vol. 142, 106553, Available at SSRN: https://ssrn.com/abstract=3486351 or http://dx.doi.org/10.2139/ssrn.3486351

Thuy Duong Dang (Contact Author)

Leibniz Universität Hannover

Königworther Platz 1
Hannover, 30167
Germany

Fabian Hollstein

Saarland University ( email )

Campus
Saarbrucken, Saarland D-66123
Germany

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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