Extending Fama-French Factors to Corporate Bond Markets
Posted: 18 Jan 2016 Last revised: 4 Oct 2019
Date Written: February 1, 2017
The explanatory power of size, value, profitability and investment has been extensively studied for equity markets. Yet, the relevance of these factors in global credit markets is less explored although equities and bonds should be related according to structural credit risk models. We investigate the impact of the four Fama-French factors in the U.S. and European credit space. While all factors exhibit economically and statistically significant excess returns in the U.S. high yield market, we find mixed evidence for U.S. and European investment grade markets. Nevertheless, we show that investable multi-factor portfolios outperform the corresponding corporate bond benchmarks on a risk-adjusted basis. Finally, our results highlight the impact of company level characteristics on the joint return dynamics of equities and corporate bonds.
Keywords: corporate bonds, risk premia, factors, size, value, profitability, investment
JEL Classification: G11, G12, G14
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