Hot Hands in Bond Funds
Journal of Banking & Finance , Volume 32 - Issue 4 p. 559- 572
We investigate persistence in the relative performance of 3549 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.
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Huij, J.J, & Derwall, J. (2008). Hot Hands in Bond Funds. Journal of Banking & Finance, 32(4), 559–572. doi:10.1016/j.jbankfin.2007.04.023