Zero Returns in Chinese Bond Funds

Abstract

Zero returns are common in Chinese bond funds: on more than 25% of trading days, NAVs do not change. Nontrading of the underlying assets is likely to be an important contributor. If the bonds held by a fund are not traded due to illiquidity, the fund itself is unlikely to update its price. As a result, NAVs are stale and biased, which may result in some degree of unfairness and irrationality. This paper aims to study the zero returns in Chinese bond funds due to non-trading of bonds held by the funds, and further divides the full sample into bond funds with lock-up period, bond funds without lock-up period for comparison. This paper also analyzes the unique operation system of Chinese bond market and its effect on bond market liquidity.