IDEAS home Printed from https://ideas.repec.org/p/zbw/cfrwps/2105.html
   My bibliography  Save this paper

On the valuation skills of corporate bond mutual funds

Author

Listed:
  • Cici, Gjergji
  • Zhang, Pei (Alex)

Abstract

We introduce a new measure to assess the valuation skills of investment-grade corporate bond funds. Our measure recognizes funds that ex-ante hold a higher fraction of undervalued bonds as having better valuation skills. The measure predicts future fund performance, is stable over time, and is unrelated to other sources of skill. Fund investors recognize such skill by responding more to the past performance of funds with better valuation skills. Consistent with the equilibrium model of Gârleanu and Pedersen (2018), our evidence suggests that as growing capital gets allocated to skilled bond funds, the corporate bond market is becoming more efficient.

Suggested Citation

  • Cici, Gjergji & Zhang, Pei (Alex), 2021. "On the valuation skills of corporate bond mutual funds," CFR Working Papers 21-05, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:2105
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/232549/1/1752613678.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Blake, Christopher R & Elton, Edwin J & Gruber, Martin J, 1993. "The Performance of Bond Mutual Funds," The Journal of Business, University of Chicago Press, vol. 66(3), pages 370-403, July.
    2. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, "undated". "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 3-98, Wharton School Rodney L. White Center for Financial Research.
    3. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    4. Dan Covitz & Chris Downing, 2007. "Liquidity or Credit Risk? The Determinants of Very Short‐Term Corporate Yield Spreads," Journal of Finance, American Finance Association, vol. 62(5), pages 2303-2328, October.
    5. Qiping Xu, 2018. "Kicking Maturity Down the Road: Early Refinancing and Maturity Management in the Corporate Bond Market," The Review of Financial Studies, Society for Financial Studies, vol. 31(8), pages 3061-3097.
    6. Novy-Marx, Robert, 2013. "The other side of value: The gross profitability premium," Journal of Financial Economics, Elsevier, vol. 108(1), pages 1-28.
    7. Chen, Hsiu-Lang & Jegadeesh, Narasimhan & Wermers, Russ, 2000. "The Value of Active Mutual Fund Management: An Examination of the Stockholdings and Trades of Fund Managers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(3), pages 343-368, September.
    8. Goldstein, Itay & Jiang, Hao & Ng, David T., 2017. "Investor flows and fragility in corporate bond funds," Journal of Financial Economics, Elsevier, vol. 126(3), pages 592-613.
    9. Ľuboš Pástor & Robert F. Stambaugh & Lucian A. Taylor, 2017. "Do Funds Make More When They Trade More?," Journal of Finance, American Finance Association, vol. 72(4), pages 1483-1528, August.
    10. Choi, Jaewon & Hoseinzade, Saeid & Shin, Sean Seunghun & Tehranian, Hassan, 2020. "Corporate bond mutual funds and asset fire sales," Journal of Financial Economics, Elsevier, vol. 138(2), pages 432-457.
    11. Nicolae Gârleanu & Lasse Heje Pedersen, 2018. "Efficiently Inefficient Markets for Assets and Asset Management," Journal of Finance, American Finance Association, vol. 73(4), pages 1663-1712, August.
    12. Yong Chen & Nan Qin, 2017. "The Behavior of Investor Flows in Corporate Bond Mutual Funds," Management Science, INFORMS, vol. 63(5), pages 1365-1384, May.
    13. K. J. Martijn Cremers & Antti Petajisto, 2009. "How Active Is Your Fund Manager? A New Measure That Predicts Performance," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3329-3365, September.
    14. Nikolova, Stanislava & Wang, Liying & Wu, Juan (Julie), 2020. "Institutional allocations in the primary market for corporate bonds," Journal of Financial Economics, Elsevier, vol. 137(2), pages 470-490.
    15. Bai, Jennie & Bali, Turan G. & Wen, Quan, 2019. "Common risk factors in the cross-section of corporate bond returns," Journal of Financial Economics, Elsevier, vol. 131(3), pages 619-642.
    16. repec:bla:jfinan:v:53:y:1998:i:4:p:1389-1413 is not listed on IDEAS
    17. Daniel, Kent, et al, 1997. "Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-1058, July.
    18. Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
    19. Hendrik Bessembinder & Kathleen M. Kahle & William F. Maxwell & Danielle Xu, 2009. "Measuring Abnormal Bond Performance," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4219-4258, October.
    20. Martijn Cremers & Antti Petajisto, 2006. "How Active is Your Fund Manager? A New Measure That Predicts Performance," Yale School of Management Working Papers amz2370, Yale School of Management, revised 01 May 2009.
    21. Richard B. Evans, 2010. "Mutual Fund Incubation," Journal of Finance, American Finance Association, vol. 65(4), pages 1581-1611, August.
    22. John Y. Campbell & Glen B. Taksler, 2003. "Equity Volatility and Corporate Bond Yields," Journal of Finance, American Finance Association, vol. 58(6), pages 2321-2350, December.
    23. Heitor Almeida & Thomas Philippon, 2007. "The Risk‐Adjusted Cost of Financial Distress," Journal of Finance, American Finance Association, vol. 62(6), pages 2557-2586, December.
    24. Jeremiah Green & John R. M. Hand & X. Frank Zhang, 2017. "The Characteristics that Provide Independent Information about Average U.S. Monthly Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 30(12), pages 4389-4436.
    25. Cici, Gjergji & Gibson, Scott & Moussawi, Rabih, 2017. "Explaining and benchmarking corporate bond returns," CFR Working Papers 17-03, University of Cologne, Centre for Financial Research (CFR).
    26. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, "undated". "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 03-98, Wharton School Rodney L. White Center for Financial Research.
    27. Girardi, Giulio & Hanley, Kathleen W. & Nikolova, Stanislava & Pelizzon, Loriana & Sherman, Mila Getmansky, 2021. "Portfolio similarity and asset liquidation in the insurance industry," Journal of Financial Economics, Elsevier, vol. 142(1), pages 69-96.
    28. Kewei Hou & Chen Xue & Lu Zhang, 2015. "Editor's Choice Digesting Anomalies: An Investment Approach," The Review of Financial Studies, Society for Financial Studies, vol. 28(3), pages 650-705.
    29. Moneta, Fabio, 2015. "Measuring bond mutual fund performance with portfolio characteristics," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 223-242.
    30. Dick-Nielsen, Jens & Feldhütter, Peter & Lando, David, 2012. "Corporate bond liquidity before and after the onset of the subprime crisis," Journal of Financial Economics, Elsevier, vol. 103(3), pages 471-492.
    31. Chen, Yong & Ferson, Wayne & Peters, Helen, 2010. "Measuring the timing ability and performance of bond mutual funds," Journal of Financial Economics, Elsevier, vol. 98(1), pages 72-89, October.
    32. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    33. Helwege, Jean & Huang, Jing-Zhi & Wang, Yuan, 2014. "Liquidity effects in corporate bond spreads," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 105-116.
    34. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1995. "Fundamental Economic Variables, Expected Returns, and Bond Fund Performance," Journal of Finance, American Finance Association, vol. 50(4), pages 1229-1256, September.
    35. Wayne Ferson & Tyler R. Henry & Darren J. Kisgen, 2006. "Evaluating Government Bond Fund Performance with Stochastic Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 423-455.
    36. Raphael Schestag & Philipp Schuster & Marliese Uhrig-Homburg, 2016. "Measuring Liquidity in Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1170-1219.
    37. Choi, Jaewon & Kim, Yongjun, 2018. "Anomalies and market (dis)integration," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 16-34.
    38. Cici, Gjergji & Gibson, Scott, 2012. "The Performance of Corporate Bond Mutual Funds: Evidence Based on Security-Level Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 159-178, February.
    39. Long Chen & David A. Lesmond & Jason Wei, 2007. "Corporate Yield Spreads and Bond Liquidity," Journal of Finance, American Finance Association, vol. 62(1), pages 119-149, February.
    40. Nanda, Vikram & Wu, Wei & Zhou, Xing (Alex), 2019. "Investment Commonality across Insurance Companies: Fire Sale Risk and Corporate Yield Spreads," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(6), pages 2543-2574, December.
    41. Huij, Joop & Derwall, Jeroen, 2008. ""Hot Hands" in bond funds," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 559-572, April.
    42. Eugene F. Fama & Kenneth R. French, 2010. "Luck versus Skill in the Cross‐Section of Mutual Fund Returns," Journal of Finance, American Finance Association, vol. 65(5), pages 1915-1947, October.
    43. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    44. Pierre Collin-Dufresn & Robert S. Goldstein & J. Spencer Martin, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lesmeister, Simon & Limbach, Peter & Rau, P. Raghavendra & Sonnenburg, Florian, 2022. "Indexing and the performance-flow relation of actively managed mutual funds," CFR Working Papers 22-02, University of Cologne, Centre for Financial Research (CFR).
    2. Ivanov, Ivan T. & Zimmermann, Tom & Heinrich, Nathan W., 2022. "Limits of disclosure regulation in the municipal bond market," CFR Working Papers 22-05, University of Cologne, Centre for Financial Research (CFR).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Qin, Nan & Wang, Ying, 2021. "Does portfolio concentration affect performance? Evidence from corporate bond mutual funds," Journal of Banking & Finance, Elsevier, vol. 123(C).
    2. Moneta, Fabio, 2015. "Measuring bond mutual fund performance with portfolio characteristics," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 223-242.
    3. Fulkerson, Jon A. & Riley, Timothy B., 2019. "Portfolio concentration and mutual fund performance," Journal of Empirical Finance, Elsevier, vol. 51(C), pages 1-16.
    4. Markus Natter & Martin Rohleder & Dominik Schulte & Marco Wilkens, 2017. "Bond mutual funds and complex investments," Journal of Asset Management, Palgrave Macmillan, vol. 18(6), pages 433-456, October.
    5. Yong Chen & Nan Qin, 2017. "The Behavior of Investor Flows in Corporate Bond Mutual Funds," Management Science, INFORMS, vol. 63(5), pages 1365-1384, May.
    6. Xuanjuan Chen & Jing-Zhi Huang & Zhenzhen Sun & Tong Yao & Tong Yu, 2020. "Liquidity Premium in the Eye of the Beholder: An Analysis of the Clientele Effect in the Corporate Bond Market," Management Science, INFORMS, vol. 66(2), pages 932-957, February.
    7. DeMiguel, Victor & Gil-Bazo, Javier & Nogales, Francisco J. & Santos, André A.P., 2023. "Machine learning and fund characteristics help to select mutual funds with positive alpha," Journal of Financial Economics, Elsevier, vol. 150(3).
    8. Dang, Thuy Duong & Hollstein, Fabian & Prokopczuk, Marcel, 2022. "How do corporate bond investors measure performance? Evidence from mutual fund flows," Journal of Banking & Finance, Elsevier, vol. 142(C).
    9. Elton, Edwin J. & Gruber, Martin J., 2013. "Mutual Funds," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1011-1061, Elsevier.
    10. Bai, John Jianqiu & Tang, Yuehua & Wan, Chi & Yüksel, H. Zafer, 2022. "Fund manager skill in an era of globalization: Offshore concentration and fund performance," Journal of Financial Economics, Elsevier, vol. 145(2), pages 18-40.
    11. Andrew Clare & Mariana Clare, 2019. "An examination of ex ante fund performance: identifying indicators of future performance," Journal of Asset Management, Palgrave Macmillan, vol. 20(3), pages 175-195, May.
    12. Jun Kyung Auh & Jennie Bai, 2020. "Cross-Asset Information Synergy in Mutual Fund Families," NBER Working Papers 26626, National Bureau of Economic Research, Inc.
    13. Victor DeMiguel & Javier Gil-Bazo & Francisco J. Nogales & André A. P. Santos, 2021. "Can Machine Learning Help to Select Portfolios of Mutual Funds?," Working Papers 1245, Barcelona School of Economics.
    14. Dahm, Laura K. & Sorhage, Christoph, 2015. "Milk or wine: Mutual funds' (dis)economies of life," CFR Working Papers 15-05, University of Cologne, Centre for Financial Research (CFR).
    15. Stephanie Heck, 2022. "Corporate bond yields and returns: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(2), pages 179-201, June.
    16. Dekker, Lennart, 2024. "Essays on asset liquidity and investment funds," Other publications TiSEM 5fc9bf77-84e7-4a36-9e3a-1, Tilburg University, School of Economics and Management.
    17. Dahlquist, Magnus & Odegaard, Bernt Arne, 2018. "A Review of Norges Bank's Active Management of the Government Pension Fund Global," UiS Working Papers in Economics and Finance 2018/1, University of Stavanger.
    18. Boguth, Oliver & Simutin, Mikhail, 2018. "Leverage constraints and asset prices: Insights from mutual fund risk taking," Journal of Financial Economics, Elsevier, vol. 127(2), pages 325-341.
    19. Jiang, George J. & Zaynutdinova, Gulnara R. & Zhang, Huacheng, 2021. "Stock-selection timing," Journal of Banking & Finance, Elsevier, vol. 125(C).
    20. Mateus, Irina B. & Mateus, Cesario & Todorovic, Natasa, 2019. "Review of new trends in the literature on factor models and mutual fund performance," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 344-354.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:cfrwps:2105. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/cfkoede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.