Beating the Benchmark: Bond Portfolios based on Country and Industry Factors

29 Pages Posted: 18 Aug 2017 Last revised: 8 Jan 2021

See all articles by Mary Pieterse-Bloem

Mary Pieterse-Bloem

Erasmus Research Institute of Management (ERIM)

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Zhaowen Qian

Erasmus University Rotterdam (EUR) - Department of Business Economics

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute

Date Written: January 8, 2021

Abstract

In this paper, we propose a dynamic portfolio strategy for European corporate bonds based on a two-factor pricing model: country and industry. We introduce a strategy in which we forecast both future factors as well as bonds' future exposure to these factors. Using a unique dataset that is representative of the universe of actively quoted European corporate bonds, we find that the strategy outperforms the naive benchmark. Our strategy yields a Sharpe ratio of 0.15 in the optimal setting, relative to the naive portfolio of 0.07. The results are mainly driven by the forecasted factors and less by forecasted exposures to these factors. The performance is especially driven by the euro-countries and suggests that `tides' of bond market integration are an important contributor to performance. Finally, our findings suggest that the strategy benefits from a more heterogeneous cross-section of countries.

Keywords: Corporate bonds; Dynamic portfolio strategies; Country and industry factors; Mean-variance model

JEL Classification: G11, G12, G17

Suggested Citation

Pieterse-Bloem, Mary and Verschoor, Willem F. C. and Qian, Zhaowen and Zwinkels, Remco C.J., Beating the Benchmark: Bond Portfolios based on Country and Industry Factors (January 8, 2021). Available at SSRN: https://ssrn.com/abstract=3020999 or http://dx.doi.org/10.2139/ssrn.3020999

Mary Pieterse-Bloem

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Willem F. C. Verschoor (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Zhaowen Qian

Erasmus University Rotterdam (EUR) - Department of Business Economics ( email )

Netherlands

Remco C.J. Zwinkels

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NH 1081 HV
Netherlands
+31205985220 (Phone)

HOME PAGE: http://https://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://https://tinbergen.nl/person/1574/remco-zwinkels

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