Institutional Trading and Corporate Bond Returns

Thursday, December 13, 2012 ( 4:00 pm to 5:00 pm )

Location: Babbio 221

Institutional Trading and Corporate Bond Returns

Jianing Zhang, Ph.D. candidate, Pennsylvania State University



Using a novel holdings dataset of corporate bond mutual funds, I investigate the value of active fund management by examining the performance of their detailed trades. I find that the junk bonds bought by fund managers underperformed those they sold by 2.98% over the following year; while the investment-grade bonds they bought outperformed those they sold by 0.54% over the following two quarters. The underperformance in trading junk bonds cannot be explained by the story of asset fire sales driven by investor money outflows or bond rating downgrade, nor by the story of price pressure driven by fund herding or positive-feedback trading. Instead, the results are more consistent with the hypothesis that fund managers possess inferior ability in selecting junk bonds and superior ability in selecting investment-grade bonds. The results are robust for alternative performance measures and for a subsample excluding the financial crisis period.



Mr. Jianing Zhang is a PhD candidate in finance at Penn State University. His research interests include equity and bond mutual funds, treasury inflation protected securities, and sovereign credit default swaps. He has two coauthored publications at Financial Review and Finance Research Letters. His other coauthored paper is currently under review at Journal of Financial Economics.

Mr. Zhang also obtained a Ph.D. in polymer science from University of Massachusetts Amherst, where he worked on Monte Carlo simulations of polymer crystallization and amyloid assembly. He has three publications at Journal of Chemical Physics and Physical Review E.