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
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
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