Factor Investing in the Corporate Bond Market
49 Pages Posted: 31 Oct 2014 Last revised: 13 Feb 2017
Date Written: September 26, 2016
We offer empirical evidence that size, low-risk, value, and momentum factor portfolios generate economically meaningful and statistically significant alphas in the corporate bond market. Because the correlations between the single-factor portfolios are low, a combined multi-factor portfolio benefits from diversification among the factors: It has a lower tracking error and a higher information ratio than the individual factors. Our results are robust to transaction costs, alternative factor definitions, alternative portfolio construction settings, and constructing factor portfolios on a subsample of liquid bonds. Finally, allocating to corporate bond factors provides added value beyond allocating to equity factors in a multi-asset context.
Keywords: corporate bonds, factor premiums, strategic asset allocation, size, low-risk, value, momentum
JEL Classification: G11, G12, G14, E44
Suggested Citation: Suggested Citation