Thesis advisor: Pierluigi Balduzzi / Employing a novel data set of portfolio weights from 1997 to 2006, the performance of taxable bond mutual funds is studied. The timing ability of fund managers is examined considering different asset allocation choices such as asset class, credit quality allocation, and portfolio maturity decisions. I show that active managers engage in strategies of rotating their portfolios across fixed-income sectors and bond characteristics. Some bond funds exhibit successful timing ability by adopting these strategies. Comparing fund returns plus expenses and transaction costs with the returns of a portfolio that is invested in the previously disclosed holdings, I document that active managers exhibit some ability to select securities that deliver better returns than the securities in the indices. In particular, on average, active managers generate gross returns of 1% per annum over the benchmark portfolio constructed using past holdings. / Thesis (PhD) — Boston College, 2009. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

Thesis advisor: Pierluigi Balduzzi / Thesis advisor: Jonathan Reuter / In the first essay of this dissertation, I study the impact of fund redemptions and resulting sell-offs on corporate bond yields. To control for unobserved changes in fundamentals, I study within-issuer variation of yield changes, resulting from differential exposure to redemptions and sell-offs. In contrast to previous findings for equity funds, I find no evidence indicating that bond funds destabilize the corporate bond market by moving prices beyond fundamental values. I attribute this finding to bond fund management. Although I find that investors demonstrate a bank-run like behavior, which is a potential source of destabilization, bond fund managers hold a significant level of liquid assets, allowing them to manage redemptions without excessively liquidating corporate bonds. Second essay of this dissertation looks at corporate bond Exchange Traded Funds (ETFs) which are a new form of financial innovation. Since these investment vehicles are relatively new, little is known about their risks. In this paper, we study an event in the summer 2013, knows as the Taper Tantrum, when bond ETFs and mutual funds experienced massive unexpected outflows due to speculations about interest rate hikes. We find that ETF outflows during the Taper Tantrum lead to a significant increase in exposed corporate bond yields. The increase in yields lasts for seven months, which indicates a temporary fire sale effect. In contrast, we find no fire sale effect resulting from mutual fund outflows. We attribute this contrasting finding between the two vehicles to differences in portfolio construction and investor sensitivities. Finally, we study arbitrage opportunities, created by ETF shares mispricing, and their impact on bond yields. Third essay of this dissertation is about liquidity in the corporate bond market. In market distress, corporate bond investors tend to sell liquid assets and hold onto illiquid ones, a phenomenon which we call flight to illiquidity. We study the impact of flight to illiquidity on corporate bond prices/yields in cross-section as well as corporate bond returns in time-series. First, we show that liquidity price premium disappears in market distress, meaning that liquid bonds are not more expensive than illiquid bonds in distress times. Second, we show that illiquiduity return premium which exists during normal times, not only does not change sign or disappears, but also widens in market distress. In other words, liquid bonds deliver a lower return both on average and during market distress. This pattern is limited to investment grade corporate bonds. Our findings suggest that keeping the credit risk fixed, liquid bonds do not provide safety during the time it is needed the most. / Thesis (PhD) — Boston College, 2016. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

This thesis focuses on the analysis of Catastrophe bond mutual funds [CBMFs] and is organized into four chapters. The first chapter, "An identification-robust analysis of Catastrophe bond mutual funds: zero-beta neutrality under tradability", offers identification-robust evidence on whether CBMFs are zero-beta based on the analysis with only tradable risk factors. Statistical significance of factor risk premiums and cross-sectional loadings is examined in a multivariate, identification-robust setting to inform on the zero-beta performance of CBMFs. The latter is assessed against the Capital Asset Pricing Model [CAPM] without the risk-less asset proposed by Black (1972) [BCAPM], Quadratic CAPM, Cummins-Weiss, Fama-French-Carhart benchmarks and models with Fontaine and Garcia (2012) and Pástor and Stambaugh (2003) liquidity factors. Multiple markets are considered individually and jointly. Beta pricing inference proceeds using the method of Beaulieu, Dufour and Khalaf (2013) robust to weak identification. Instead of non-tradable factors, their mimicking portfolio returns are used in the analysis to facilitate tradable-only factor setting. Results indicate that coskewness, funding liquidity and fixed-income factors are often priced or incur significant factor betas. There is also evidence of risk premiums and joint beta significance for stock, corporate bond and commercial mortgage-backed securities benchmarks. Empirical findings overall suggests that CBMFs underperformed as zero-beta assets. The second chapter, "Zero-beta inference on Catastrophe bond mutual funds: identification- robust evidence with non-tradable factors", examines formally the zero-beta neutrality of CBMFs allowing for some risk factors to be non-tradable. Zero-beta analysis focuses on cross-sectional betas with their joint significance tested for each factor. This is augmented with inference on risk prices and the zero-beta rate to assess whether factor risks are priced. CBMFs are modeled in the QCAPM setting with either stock, corporate bond, government bond or commercial mortgage-backed security [CMBS] market return and its square as respectively tradable and non-tradable factors. The zero-beta performance of CBMFs is also assessed against an extended BCAPM benchmark with either Fontaine and Garcia (2012) or Pástor and Stambaugh (2003) non-tradable liquidity factor considered in addition to the tradable market return. Inference on risk prices and the zero-beta rate builds on the method of Beaulieu, Dufour and Khalaf (2018) which remains exact and simultaneous for any sample size even if the parameter recovery is impaired. Empirically, although identification strength diminishes in the setting with non-tradable factors, relaxing tradability improves model fit across all benchmarks. In particular, QCAPM (reix gardless of the market) is no longer rejected for any period and so is the model with the funding liquidity factor. Goodness-of-fit also improves for the model with the marketwide liquidity factor. In periods for which models were rejected under factor tradability, allowing for some factors to be non-tradable also yields set estimates for the zero-beta rate and risk prices that are informative for beta pricing. In particular, this reveals evidence of priced coskewness risk across all markets over the long-run and for stock, corporate bond and CMBS benchmarks after the 2007-09 US recession. In the same periods, funding liquidity risk is also priced and so is the marketwide liquidity risk over the full sample. Given significant betas on the market return, the latter prevails as a relevant factor even in a setting with other factors being non-tradable. Overall, there is evidence suggesting that CBMFs deviated from performing as zero-beta investments with coskewness and liquidity as contributing factors. These results reinforce findings in the Chapter 1. The third chapter, "An alpha and risk analysis of Catastrophe bond mutual funds: exact, simultaneous inference", examines CBMFs in terms of their ability to produce a positive alpha and the extent of their sensitivity to the developments in financial markets. Inference on alphas and the riskiness of CBMFs relies on exact, simultaneous confidence sets assembled respectively for cross-sectional intercepts and factor loadings in the multivariate linear regression [MLR] model. Set construction proceeds using the analytical inversion procedure of Beaulieu, Dufour and Khalaf (2018) in a Least-Squares case and its extension to a Student-t setting. Proposed in this chapter, the extension involves replacing the Fisher-based cut-off point in the analytical solution of Beaulieu, Dufour and Khalaf (2018) with its simulation-based counterpart obtained under Student-t errors. The empirical analysis of CBMFs reveals evidence of a positive alpha following the 2011 Tohoku earthquake in Japan and indicate that CBMFs are likely to have at most moderate sensitivity to fluctuations in financial markets. These results are robust against CAPM, QCAPM and Fama-French benchmarks and observed in both Gaussian and Student-t settings. The fourth chapter, "Endogeneity in a zero-beta analysis: joint, finite sample inference on Catastrophe bond mutual funds", revisits the zero-beta assessment of CBMFs taking into account factor endogeneity. In particular, this chapter extends the univariate Durbin-Wu-Hausman [DWH] test (Durbin, 1954; Wu, 1973; Hausman, 1978) of exogeneity to a multivariate setting. Unlike the univariate DWH test, the proposed multivariate extension allows to assess factor exogeneity jointly across equations. This chapter also proposes an extended version of the multivariate Wilks-based instrumental variables [IV] test of Dufour, Khalaf and Kichian (2013) to a setting with regressors, and consequently their instruments, that remain the same across equations. Both extended tests allow for possibly non-Gaussian errors and maintain size correctness for a sample with any number of observations even in the setting with weak instruments. Applying the extended methods to the analysis CBMFs provides evidence against joint factor exogeneity in some cases across CAPM and QCAPM in both Gaussian and Student-t settings. In some periods when the joint factor exogeneity is rejected, results for the zero-beta analysis differ depending on whether the IV-based or non-IV test was applied. Unlike in the case without instrumenting, extended Wilks-based IV test of joint beta significance is significant at the 5% level before the 2007-09 US recession for both CAPM and QCAPM regardless of the distributional setting (Gaussian or Student-t). The same result also obtains for QCAPM during the economic downturn. Over the long-run, there is evidence of jointly significant factor loadings obtained with and without instrumenting. Overall, empirical results suggest that performance of CBMFs differs from that of zero-beta assets.