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How do corporate bond investors measure performance? Evidence from mutual fund flows

Dang, T. D. ORCID: https://orcid.org/0000-0002-1345-2642, Hollstein, F. ORCID: https://orcid.org/0000-0002-0838-1544 and Prokopczuk, M. (2022) How do corporate bond investors measure performance? Evidence from mutual fund flows. Journal of Banking & Finance, 142. 106553. ISSN 03784266

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To link to this item DOI: 10.1016/j.jbankfin.2022.106553

Abstract/Summary

Which factor model do investors in corporate bonds use? We examine this question by tracking investors’ decisions to invest in actively managed corporate bond mutual funds with a revealed preference approach. Our main result is that all bond factor models are dominated by the simple Sharpe ratio and Morningstar ratings. For all major corporate bond mutual fund styles, the Sharpe ratio explains fund flows better than alphas from bond factor models. Since the Sharpe ratio (and to some extent also Morningstar ratings) can be easily manipulated in bond markets, our findings have potentially severe implications for all market participants.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:105634
Publisher:Elsevier

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