Giorgio Ottonello (Vienna Graduate School)
25 January 2019 @ 12:00 - 13:30
Abstract: I empirically study the asset pricing implications of corporate bond funds’ performance concerns relative to a benchmark index. Benchmarking has a large impact on bond prices, as funds re-balance in response to index weight changes. On average, a long/short portfolio of bonds with an increase/decrease in index weights generates a monthly alpha of 40 bps. The direction and magnitude of this effect depend on past flows and cash levels of both passive and active funds holding the assets. The impact gets larger when more investors are benchmarked. My findings show that benchmarking is an important channel through which institutions affect the pricing of corporate bonds beyond fundamentals.