Working Paper: NBER ID: w15318
Authors: Yong Chen; Wayne Ferson; Helen Peters
Abstract: This paper evaluates the ability of bond funds to "market time" nine common factors related to bond markets. Timing ability generates nonlinearity in fund returns as a function of common factors, but there are several non-timing-related sources of nonlinearity. Controlling for the non-timing-related nonlinearity is important. Funds' returns are more concave than benchmark returns, and this would appear as poor timing ability in naive models. With controls, the timing coefficients appear neutral to weakly positive. Adjusting for nonlinearity the performance of many bond funds is significantly negative on an after-cost basis, but significantly positive on a before-cost basis.
Keywords: mutual funds; market timing; bond funds; investment performance; evaluation
JEL Codes: C15; C31; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bond funds exhibit a nonlinear relationship in returns as a function of common market factors (G12) | returns are more concave than those of unmanaged benchmarks (G11) |
| non-timing-related nonlinearity (C32) | timing coefficients of bond funds appear neutral to weakly positive (G12) |
| controlling for non-timing-related nonlinearity (C32) | bond funds do not have significant negative timing ability (G12) |
| performance of many bond funds is significantly negative on an after-cost basis (G12) | performance of many bond funds is significantly positive on a before-cost basis (G12) |
| appropriate adjustments for nonlinearity and other biases (C51) | performance can be misleading (L25) |