Towards a dead end? EMU bond market exposure and manager performance

Gueorgui S. Konstantinov and Frank J. Fabozzi

Journal of International Money and Finance, 2021, vol. 116, issue C

Abstract: Using factor models we empirically investigate the performance of European Monetary Union (EMU) bond managers. We find that (1) alpha is time varying, (2) bond managers exhibit alpha in the short run as opposed to long-term prior to the Global Financial Crisis (GFC), and (3) bond fund alpha is associated with government bond funds and funds with heavy exposure to government bonds. Our factor models do not detect alpha in corporate and high-yield bond funds on average. We observe that alpha was much higher in the period prior to the GFC that began in 2008. The number of funds in our sample generating alpha dropped significantly after that crisis and remained very low from 2008 to 2017 as EMU markets recovered. We apply three models to evaluate EMU bond fund manager alpha. We use the two bond-market related Fama-French factors – term and default. In addition, we use the three equity market-related Fama-French factors – size, value, and market – together with the momentum factor. We find evidence that the bond market-related Fama-French factors are significant for the EMU bond funds in our sample, but the equity market-related Fama-French factors are not. By applying factor analysis to the returns of EMU bond funds, we (1) identify the economic drivers of EMU bond market returns and (2) show the performance of bond portfolio managers regarding alpha prior to the GFC and explain the possible lack of alpha after the GFC.

Keywords: Alpha; Manager performance; Factor models; EMU bond funds (search for similar items in EconPapers)
JEL-codes: C2 G12 G15 G23 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:116:y:2021:i:c:s026156062100084x

DOI: 10.1016/j.jimonfin.2021.102433

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