Navigating Inflation Risk in Corporate Bond Markets: Evidence from Mutual Funds
60 Pages Posted: 30 Nov 2023
Date Written: November 15, 2023
The global inflation surge has refocused attention on the impact of inflation risks. We investigate whether mutual fund managers time the inflation risks in the corporate bond market. Our findings reveal a significant and robust timing ability among managers in different investment subcategories, translating into a sizable fund performance of around 4% per annum. Timing is associated with managers adjusting portfolio holdings to bet on future risks rather than past realizations. Cross-sectional evidence suggests that over 40% individual funds exhibit strong inflation risk timing ability, controlling alternative timing abilities, factor structures, and monetary policy shocks. The bootstrapping exercise further validates managerial skills rather than pure luck. Our results provide policy implications for monetary policy transmission in corporate bond markets.
Keywords: Inflation risk, corporate bonds, mutual funds, timing ability
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation