Details
| Original language | English |
|---|---|
| Article number | 106553 |
| Journal | Journal of Banking and Finance |
| Volume | 142 |
| Early online date | 23 May 2022 |
| Publication status | Published - Sept 2022 |
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 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, Bond mutual funds, Flow–performance sensitivity, Investor flows, Performance evaluation, Sharpe ratio
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Finance
- Economics, Econometrics and Finance(all)
- Economics and Econometrics
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In: Journal of Banking and Finance, Vol. 142, 106553, 09.2022.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - How do corporate bond investors measure performance?
T2 - Evidence from mutual fund flows
AU - Dang, Thuy Duong
AU - Hollstein, Fabian
AU - Prokopczuk, Marcel
PY - 2022/9
Y1 - 2022/9
N2 - 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 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.
AB - 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 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.
KW - Bond factor models
KW - Bond mutual funds
KW - Flow–performance sensitivity
KW - Investor flows
KW - Performance evaluation
KW - Sharpe ratio
UR - http://www.scopus.com/inward/record.url?scp=85132451016&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2022.106553
DO - 10.1016/j.jbankfin.2022.106553
M3 - Article
AN - SCOPUS:85132451016
VL - 142
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
M1 - 106553
ER -