Tournament behavior of US corporate bond mutual funds: A non-parametric analysis

Abstract: This thesis tests the tournament hypothesis on a data set of corporate bond mutual funds. According to the tournament hypothesis portfolios ranked as "losers" at an interim date will increase portfolio volatility to a greater extent than funds ranked as "winners". Our analysis shows that small investment grade funds exhibit significant tournament behavior. Large investment grade funds exhibit no tournament behavior, either because they have less adverse incentive or because it is more difficult for them to adjust their portfolio volatility. High yield funds exhibit tournament behavior regardless of size and historical performance seems to not significantly impact a manager's decision to adjust volatility. This suggests that investors in high yield funds are more concerned with short-term than long term performance.