Performance of fixed-income mutual funds with regime-switching models

• Published in: The Quarterly review of economics and finance 2018-08, Vol.69, p.217-231
• Main Authors: Ayadi, Mohamed A., Lazrak, Skander, Liao, Yusui, Welch, Robert
• Format: Article
• Language: English
• Subjects: Fixed-income mutual funds; Markovian regime-switching models; Performance evaluation; Selection and timing abilities
• ISSN: 1062-9769; 1878-4259
• DOI: 10.1016/j.qref.2018.03.005

•We assess the performance of fixed-income mutual funds using regime-switching models.•Fund returns are described by two distinct volatility related bull and bear regimes.•Canadian fixed-income fund managers do not have selection abilities.•Canadian fixed-income fund managers have worse performance during recessions.•There is mixed evidence on timing abilities of fixed-income fund managers. We use Markovian regime-switching models to assess the performance of Canadian fixed-income mutual funds from 1980 to 2011. Fund returns are well described by two distinct volatility related bull and bear regimes. While the selection performance of Canadian fixed-income funds is negative, it is regime dependent and deteriorates during recessions. We also find mixed results on the timing ability of fund managers with poor performance for Canadian inflation protected fixed-income funds, Canadian long-term fixed-income funds, and Canadian money market funds groups. Finally, we show that a multivariate regime-switching model is superior to univariate models given the dynamic market conditions and the fund portfolios’ cross-correlations.