Academic journal article International Journal of Business

The Persistence of European Bond Fund Performance: Does Conditioning Information Matter?

Academic journal article International Journal of Business

The Persistence of European Bond Fund Performance: Does Conditioning Information Matter?

Article excerpt

ABSTRACT

In this paper we investigate if past performance can be used to predict future performance in the European bond fund market. Both unconditional and conditional measures of performance are considered. To our knowledge, this is the first study, which directly analyses the impact of conditioning information in assessing the persistence phenomenon in relation to bond funds.

We find empirical evidence that indicates consistency of European bond performance. This evidence is particularly strong for the case of Spanish bond funds. Some evidence of persistence is also found for French and German bond funds. Additionally, it seems that the persistence is concentrated mainly in the poor performing funds. The results were similar whatever methodology, cross-sectional regression analysis or contingency tables, is used for assessing performance persistence. Our findings indicate that the evidence of performance persistence decreases when we consider conditional alphas, particularly for the multi-index model, which suggests that some of the persistence phenomenon is driven by time-varying betas.

JEL: G11, G12, G14

Keywords: Performance persistence; Performance evaluation; Conditional models; Bond funds

I. INTRODUCTION

The capacity of mutual fund managers to present consistently superior performance has been an important issue along with overall performance and, more recently, some studies have concentrated specifically on this issue. Performance persistence means that a fund with a good performance in the past is also likely to have a good performance in the future, or that a fund that in the past was a bad performing fund is likely to continue as a poorly performing fund in the future. Evidence of performance persistence represents not only a violation of the efficient market hypothesis but also suggests that investors may realise abnormal returns by purchasing recently good performing funds and selling recently bad performing funds.

Empirical evidence on this issue is mixed. Some studies have found evidence of fund performance persistence while others have not. Also, in some cases, the conclusion is different depending on the evaluation horizon. Hendricks, Patel and Zeckhauser (1993) found persistence only in the short run while Elton, Gruber and Blake (1996) found evidence of long-term persistence. Others found that it is dependent on the period of the study. For example, Malkiel (1995) found evidence of persistence in the 1970s but not during the 1980s. Finally, some studies have found evidence of persistence mainly in the best performing funds (Elton, Gruber and Blake, 1996) while others have found evidence of persistence for the poorly performing funds (Christopherson, Ferson and Glassman, 1998).

The use of conditioning information is one of the most recent developments on mutual fund performance. As there is now widespread empirical evidence suggesting that predetermined information variables (related to economic conditions) are useful in predicting stock and bond returns, measures of performance should take this information into account and, consequently, assume that expected returns and risks are time-varying (conditional) instead of constant (unconditional). Previous empirical findings on fund performance and on the persistence of performance which are based on unconditional measures may be biased due to the covariance between expected market returns and the conditional measure of risk. Recent studies seem to suggest that conditional performance measures make fund performance look better (e.g. Ferson and Schadt, 1996; Chen and Knez, 1996; Dahlquist and Soderlind, 1999) and might have better capacity to detect persistence of performance (e.g.: Christopherson, Ferson and Glassman 1998; Christopherson, Ferson and Turner, 1999). The underlying argument is that evidence of persistence of performance using unconditional measures may reflect the persistence of the confounding co-movement between risk and expected returns, rather than "true" persistence of performance. …

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