Bond Fund Performance During Recessions and Expansions: Empirical Evidence from a Small Market

• Author: Paulo Leite,Manuel Rocha Armada
• DOI: http://doi.org/10.1111/irfi.12098
• Published date: 01 March 2017
• Date: 01 March 2017

Bond Fund Performance During

Recessions and Expansions:

Empirical Evidence from a Small

Market*

PAULO LEITE

†

AND MANUEL ROCHA ARMADA

‡

†

Applied Management Research Unit (UNIAG), School of Management, Polytechnic

Institute of Cávado and Ave, Barcelos, Portugal and

‡

NIPE, School of Economics and Management, University of Minho, Gualtar, Braga,

Portugal

ABSTRACT

This paper provides the first investigation about bond mutual fund

performance during recession and expansion periods separately. Based on

multi-factor performance evaluation models, results show that bond funds sig-

nificantly underperform the market during both phases of the business cycle.

Nevertheless, unlike equity funds, bond funds exhibit considerably higher

alphas during good economic states than during market downturns. These

results, however, seem entirely driven by the global financial crisis sub-

period. In contrast, during the recession associated to the Euro sovereign debt

crisis, bond funds are able to accomplish neutral performance. This improved

performance throughout the debt crisis seems to be related to more conserva-

tive investment strategies, which reflect an increase in managers’risk aversion.

JEL Codes: G01; G10; G11

I. INTRODUCTION

In general, empirical studies about the performance of bond mutual funds show

that they significantly underperform the market or exhibit neutral performance,

both in the US market (e.g., Blake et al. 1993; Elton et al. 1995; Derwall and

Koedijk 2009) and in several European markets (e.g., Dahlquist et al. 2000; Silva

et al. 2003; Dietze et al. 2009). Besides, this result is not only robust to the market

under consideration but also to different performance evaluation models, rang-

ing from single-index to multi-index models, unconditional to conditional

models, regression approaches with beta pricing formulations to stochastic dis-

count factor models.

However, in spite of the considerable size of the bond retail fund industry,

we are not aware of any study that evaluates bond fund performance over

* This article is for consideration for the Letters Section.

© 2016 International Review of Finance Ltd. 2016

International Review of Finance, 17:1, 2017: pp. 163–170

DOI: 10.1111/irfi.12098