IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v32y2008i4p559-572.html
   My bibliography  Save this article

"Hot Hands" in bond funds

Author

Listed:
  • Huij, Joop
  • Derwall, Jeroen

Abstract

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 3.5Â 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.

Suggested Citation

  • Huij, Joop & Derwall, Jeroen, 2008. ""Hot Hands" in bond funds," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 559-572, April.
    • Handle: RePEc:eee:jbfina:v:32:y:2008:i:4:p:559-572
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(07)00205-1
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," The Journal of Business, University of Chicago Press, vol. 54(4), pages 513-533, October.
    2. Pastor, Lubos & Stambaugh, Robert F., 2002. "Investing in equity mutual funds," Journal of Financial Economics, Elsevier, vol. 63(3), pages 351-380, March.
    3. Brown, Stephen J & Goetzmann, William N, 1995. "Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-698, June.
    4. Pastor, Lubos & Stambaugh, Robert F., 2002. "Mutual fund performance and seemingly unrelated assets," Journal of Financial Economics, Elsevier, vol. 63(3), pages 315-349, March.
    5. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    6. Detzler, Miranda Lam, 1999. "The performance of global bond mutual funds," Journal of Banking & Finance, Elsevier, vol. 23(8), pages 1195-1217, August.
    7. 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.
    8. Wayne Ferson & Tyler R. Henry & Darren J. Kisgen, 2006. "Evaluating Government Bond Fund Performance with Stochastic Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 423-455.
    9. Robert Kosowski & Allan Timmermann & Russ Wermers & Hal White, 2006. "Can Mutual Fund “Stars” Really Pick Stocks? New Evidence from a Bootstrap Analysis," Journal of Finance, American Finance Association, vol. 61(6), pages 2551-2595, December.
    10. Brown, Stephen J, et al, 1992. "Survivorship Bias in Performance Studies," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 553-580.
    11. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    12. Jones, Christopher S. & Shanken, Jay, 2005. "Mutual fund performance with learning across funds," Journal of Financial Economics, Elsevier, vol. 78(3), pages 507-552, December.
    13. 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.
    14. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    15. Gebhardt, William R. & Hvidkjaer, Soeren & Swaminathan, Bhaskaran, 2005. "The cross-section of expected corporate bond returns: Betas or characteristics?," Journal of Financial Economics, Elsevier, vol. 75(1), pages 85-114, January.
    16. Nicolas P. B. Bollen, 2005. "Short-Term Persistence in Mutual Fund Performance," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 569-597.
    17. Malkiel, Burton G, 1995. "Returns from Investing in Equity Mutual Funds 1971 to 1991," Journal of Finance, American Finance Association, vol. 50(2), pages 549-572, June.
    18. Ferson, Wayne E & Schadt, Rudi W, 1996. "Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, vol. 51(2), pages 425-461, June.
    19. Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. "Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, vol. 49(5), pages 1861-1882, December.
    20. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    21. Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2001. "A First Look at the Accuracy of the CRSP Mutual Fund Database and a Comparison of the CRSP and Morningstar Mutual Fund Databases," Journal of Finance, American Finance Association, vol. 56(6), pages 2415-2430, December.
    22. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    23. Kosowski, Robert & Naik, Narayan Y. & Teo, Melvyn, 2007. "Do hedge funds deliver alpha? A Bayesian and bootstrap analysis," Journal of Financial Economics, Elsevier, vol. 84(1), pages 229-264, April.
    24. Hendricks, Darryll & Patel, Jayendu & Zeckhauser, Richard, 1993. "Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988," Journal of Finance, American Finance Association, vol. 48(1), pages 93-130, March.
    25. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1996. "The Persistence of Risk-Adjusted Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 69(2), pages 133-157, April.
    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. Raphaël Janssen & Romuald Morhs, 2015. "The interest rate sensitivity of Luxembourg bond funds: results from a time-varying model," BCL working papers 98, Central Bank of Luxembourg.
    2. Abbas Hejri, 2022. "On the recent developments of mutual funds with fixed‐income holdings: a systematic review," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2313-2338, June.
    3. Keith Cuthbertson & Simon Hayley & Dirk Nitzsche, 2016. "Market and Style Timing: German Equity and Bond Funds," European Financial Management, European Financial Management Association, vol. 22(4), pages 667-696, September.
    4. Dariusz Filip & Tomasz Miziołek, 2019. "Market Concentration in the Polish Investment Fund Industry," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 4, pages 53-78.
    5. Otero-González, Luis & Leite, Paulo & Durán-Santomil, Pablo & Domingues, Renato, 2022. "Morningstar Star ratings and the performance, risk and flows of European bond mutual funds," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 479-496.
    6. Qin, Nan & Wang, Ying, 2021. "Does portfolio concentration affect performance? Evidence from corporate bond mutual funds," Journal of Banking & Finance, Elsevier, vol. 123(C).
    7. Abhyankar, Abhay & Gonzalez, Angelica, 2009. "News and the cross-section of expected corporate bond returns," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 996-1004, June.
    8. Patel, Mayank & Madhavan, Vinodh & Gupta, Supratim Das & Kumar, Satish, 2023. "Performance persistence and style consistency of Indian fixed income mutual funds – A longitudinal study," International Review of Financial Analysis, Elsevier, vol. 86(C).
    9. Marius Ötting & Christian Deutscher & Carl Singleton & Luca De Angelis, 2023. "Gambling on Momentum in Contests," Economics Discussion Papers em-dp2023-08, Department of Economics, University of Reading.
    10. Witkowska Dorota, 2012. "Measurement of the Efficiency of Mutual Funds Operating on the Pan-European Market," Folia Oeconomica Stetinensia, Sciendo, vol. 12(2), pages 126-146, December.
    11. Abhay Abhyankar & Angelica Gonzalez, 2007. "What Drives Corporate Bond Market Betas?," Edinburgh School of Economics Discussion Paper Series 157, Edinburgh School of Economics, University of Edinburgh.
    12. Robert Wrathall & Rod Falvey & Gulasekaran Rajaguru, 2020. "Do (Australian) jockeys have hot hands?," Australian Journal of Management, Australian School of Business, vol. 45(2), pages 223-239, May.
    13. 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).
    14. Clare, Andrew & Cuthbertson, Keith & Nitzsche, Dirk & O'Sullivan, Niall, 2021. "How skilful are US fixed-income fund managers?," International Review of Financial Analysis, Elsevier, vol. 74(C).
    15. Maretno A. Harjoto & Andreas G. F. Hoepner & Marcus A. Nilsson, 2022. "Bondholders’ returns and stakeholders’ interests," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1271-1301, November.
    16. Martin Rohleder & Hendrik Scholz & Marco Wilkens, 2018. "Success and failure on the corporate bond fund market," Journal of Asset Management, Palgrave Macmillan, vol. 19(6), pages 429-443, October.
    17. 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.
    18. Laleh Samarbakhsh & Meet Shah, 2021. "Fixed income mutual fund performance during and after a crisis: a Canadian case," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 45(4), pages 654-676, October.
    19. Moneta, Fabio, 2015. "Measuring bond mutual fund performance with portfolio characteristics," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 223-242.
    20. Lukas Benz & Martin Rohleder & Janik Syryca & Marco Wilkens, 2019. "Shedding light on the exposure of mutual funds: Which investments drive mutual fund characteristics?," Journal of Asset Management, Palgrave Macmillan, vol. 20(7), pages 534-551, December.
    21. 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.
    22. Ayadi, Mohamed A. & Kryzanowski, Lawrence, 2011. "Fixed-income fund performance: Role of luck and ability in tail membership," Journal of Empirical Finance, Elsevier, vol. 18(3), pages 379-392, June.

    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. Yee Loon, 2011. "Model uncertainty, performance persistence and flows," Review of Quantitative Finance and Accounting, Springer, vol. 36(2), pages 153-205, February.
    2. Huij, Joop & Verbeek, Marno, 2007. "Cross-sectional learning and short-run persistence in mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 973-997, March.
    3. Ferson, Wayne E., 2013. "Investment Performance: A Review and Synthesis," 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 969-1010, Elsevier.
    4. Lehmann, Bruce & Timmermann, Allan, 2007. "Performance measurement and evaluation," LSE Research Online Documents on Economics 24505, London School of Economics and Political Science, LSE Library.
    5. Vidal-García, Javier & Vidal, Marta & Boubaker, Sabri & Uddin, Gazi Salah, 2016. "The short-term persistence of international mutual fund performance," Economic Modelling, Elsevier, vol. 52(PB), pages 926-938.
    6. 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.
    7. Joop Huij & Marno Verbeek, 2009. "On the Use of Multifactor Models to Evaluate Mutual Fund Performance," Financial Management, Financial Management Association International, vol. 38(1), pages 75-102, March.
    8. Pankaj K. Agarwal & H. K. Pradhan, 2018. "Mutual Fund Performance Using Unconditional Multifactor Models: Evidence from India," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(2_suppl), pages 157-184, August.
    9. Du, Ding & Huang, Zhaodan & Blanchfield, Peter J., 2009. "Do fixed income mutual fund managers have managerial skills?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 378-397, May.
    10. Dong‐Hyun Ahn & H. Henry Cao & Stéphane Chrétien, 2009. "Portfolio Performance Measurement: a No Arbitrage Bounds Approach," European Financial Management, European Financial Management Association, vol. 15(2), pages 298-339, March.
    11. Dariusz Filip, 2011. "Performance Persistence of Equity Funds in Hungary," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 5(1), March.
    12. Gallefoss, Kristoffer & Hansen, Helge Hoff & Haukaas, Eirik Solli & Molnár, Peter, 2015. "What daily data can tell us about mutual funds: Evidence from Norway," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 117-129.
    13. Matallín-Sáez, Juan Carlos & Soler-Domínguez, Amparo & Tortosa-Ausina, Emili, 2016. "On the robustness of persistence in mutual fund performance," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 192-231.
    14. 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.
    15. Vidal-García, Javier, 2013. "The persistence of European mutual fund performance," Research in International Business and Finance, Elsevier, vol. 28(C), pages 45-67.
    16. Jiang, George J. & Zaynutdinova, Gulnara R. & Zhang, Huacheng, 2021. "Stock-selection timing," Journal of Banking & Finance, Elsevier, vol. 125(C).
    17. Omneya Abdelsalam & Meryem Duygun & Juan Carlos Matallín-Sáez & Emili Tortosa-Ausina, 2014. "Is Ethical Money Sensitive to Past Returns? The Case of Portfolio Constraints and Persistence of Islamic and Socially Responsible Funds," Working Papers 2014/19, Economics Department, Universitat Jaume I, Castellón (Spain).
    18. Wolfgang Bessler & Thomas Conlon & Diego Víctor de Mingo‐López & Juan Carlos Matallín‐Sáez, 2022. "Mutual fund performance and changes in factor exposure," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(1), pages 17-52, March.
    19. Angelidis, Timotheos & Giamouridis, Daniel & Tessaromatis, Nikolaos, 2013. "Revisiting mutual fund performance evaluation," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1759-1776.
    20. Omneya Abdelsalam & Meryem Duygun & Juan Carlos Matallín-Sáez & Emili Tortosa-Ausina, 2017. "Is Ethical Money Sensitive to Past Returns? The Case of Portfolio Constraints and Persistence in Islamic Funds," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(3), pages 363-384, June.

    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:eee:jbfina:v:32:y:2008:i:4:p:559-572. 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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    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.