Embedded Betas and Better Bets: Factor Investing in Emerging Market Bonds

Forthcoming in the Journal Of Investment Management

37 Pages Posted: 30 Jun 2018 Last revised: 4 Oct 2018

Date Written: September 24, 2018

Abstract

We document novel empirical insights driving the prices of sovereign external emerging market bonds. In the time series, we examine the market portfolio’s time-varying exposures to a broad set of macro factors (rates, credit, currency, and equity) and identify these embedded betas as key drivers of its excess returns. In the cross-section, we construct complementary value and momentum style factors and demonstrate their ability to explain country expected returns. Building off these insights, we introduce a simple risk-on versus risk-off framework to characterize the correlation structure spanning our macro and style factors. Lastly, we show how our style factors can be incorporated in an optimized long-only portfolio to generate outperformance relative to a value-weighted benchmark portfolio.

Keywords: Emerging Market Bonds, Factor Investing, Fixed Income, Asset Pricing, External Debt

Suggested Citation

Kang, Johnny and So, Kevin and Tziortziotis, Thomas, Embedded Betas and Better Bets: Factor Investing in Emerging Market Bonds (September 24, 2018). Forthcoming in the Journal Of Investment Management. Available at SSRN: https://ssrn.com/abstract=3196018 or http://dx.doi.org/10.2139/ssrn.3196018

Johnny Kang (Contact Author)

BlackRock, Inc ( email )

400 Howard Street
San Francisco, CA 94010
United States

Kevin So

BlackRock, Inc ( email )

400 Howard St
San Francisco, CA 94105
United States

Thomas Tziortziotis

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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