'Hot Hands' in Bond Funds
34 Pages Posted: 26 Aug 2005
Date Written: April 16, 2007
We investigate persistence in the relative performance of 3,549 bond mutual funds from 1990 to 2003. We show that bond funds that display strong (weak) performance over a past period continue to do so in future periods. The out-of-sample difference in risk-adjusted return between the top and bottom decile of funds ranked on past alpha exceeds 3.5 percent per year. We demonstrate that a strategy based on past fund returns earns an economically and statistically significant abnormal return, suggesting that bond fund investors can exploit the observed persistence. Our results are robust to a wide range of model specifications and bootstrapped test statistics.
Keywords: bond mutual funds, performance persistence, active management
JEL Classification: G11, G14, G19
Suggested Citation: Suggested Citation