Valuation-Indifferent Weighting for Bonds
Posted: 4 Sep 2008 Last revised: 30 Dec 2016
Date Written: November 2, 2010
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: Suggested Citation