Valuation-Indifferent Weighting for Bonds

Posted: 4 Sep 2008 Last revised: 30 Dec 2016

See all articles by Robert D. Arnott

Robert D. Arnott

Research Affiliates, LLC

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Feifei Li

Research Affiliates, LLC

Shane D. Shepherd

Research Affiliates, LLC

Date Written: November 2, 2010

Abstract

In historical testing, valuation-indifferent weighting applied to U.S. and global equities has produced statistically significant and economically large outperformance when compared with traditional capitalization-weighted benchmarks. In this article, the authors apply valuation-indifferent weighting to U.S. investment-grade corporate bonds, U.S. high-yield bonds, and hard-currency emerging market bonds. They find that fixed-income portfolios constructed using valuation-indifferent weighting outperform their corresponding cap-weighted benchmarks. The authors also find that the outperformance is higher for markets in which more inefficiencies and greater volatilities would be expected to occur. Both findings are consistent with the empirical evidence produced in the equity applications of valuation-indifferent weighting, as well as in the proposed noise-in-price theoretical rationale for the results.

Keywords: Fundamental Index, Valuation-Indifferent Index, Bond Index

JEL Classification: G12, G14

Suggested Citation

Arnott, Robert D. and Hsu, Jason C. and Li, Feifei and Shepherd, Shane D., Valuation-Indifferent Weighting for Bonds (November 2, 2010). Journal of Portfolio Management, Vol. 36, No. 3, pp. 117-130, Spring 2010. Available at SSRN: https://ssrn.com/abstract=1263246 or http://dx.doi.org/10.2139/ssrn.1263246

Robert D. Arnott

Research Affiliates, LLC ( email )

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HOME PAGE: http://www.researchaffiliates.com/Our%20Firm/Our%20Team/Pages/Rob-Arnott.aspx

Jason C. Hsu

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Feifei Li

Research Affiliates, LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8753 (Phone)
949-325-8953 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

Shane D. Shepherd (Contact Author)

Research Affiliates, LLC ( email )

620 Newport Center Drive
Suite 900
Newport Beach, CA 92660
United States

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