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On the valuation skills of corporate bond mutual funds

Author

Listed:
  • Gjergji Cici
  • Pei (Alex) Zhang

Abstract

The corporate bond market is larger, more illiquid, and presumably less efficient than the equity market. These features provide numerous profit opportunities for corporate bond mutual funds that are unique to the corporate bond market. However, whether corporate bond mutual funds have the valuation skills needed to take advantage of these opportunities is unclear. We introduce a novel measure to assess the valuation skills of investment-grade corporate bond mutual funds, which we refer to as the valuation accuracy score (VAS). VAS recognizes funds holding more underpriced and less overpriced corporate bonds as ex-ante having better valuation skills. It predicts future fund performance, is stable over time, and is unrelated to other sources of skill. Investors chase the performance of higher-VAS funds more aggressively and exhibit a convex flow–performance relation among these funds.

Suggested Citation

  • Gjergji Cici & Pei (Alex) Zhang, 2024. "On the valuation skills of corporate bond mutual funds," Review of Finance, European Finance Association, vol. 28(6), pages 2017-2049.
    • Handle: RePEc:oup:revfin:v:28:y:2024:i:6:p:2017-2049.
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    File URL: http://hdl.handle.net/10.1093/rof/rfae028
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    More about this item

    Keywords

    mutual funds; corporate bonds; investment abilities; market efficiency; selection; timing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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