Limits to Arbitrage, Investor Sentiment, and Factor Returns in International Government Bond Markets

Economic Research-Ekonomska Istraživanja, Forthcoming

22 Pages Posted: 28 Feb 2019

See all articles by Adam Zaremba

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business

Jan Szczygielski

Department of Financial Management, University of Pretoria; Department of Accounting and Financial Management,Newcastle Business School, Northumbria University

Date Written: April 23, 2018

Abstract

The perspective of behavioral finance is that anomalies in the cross-section of returns are driven by mispricing that arises from investor irrationality that cannot be easily arbitraged away. In this study, we examine the implications of this for international government bond markets. Using data for 25 countries for the years 1992–2015, we replicate multiple factor strategies that represent four major return drivers: defensive (low-risk), carry, value and momentum. We investigate the relationships between the performance of these strategies and market-wide measures of limits to arbitrage and investor sentiment. We find that the defensive strategy performs best during tight arbitrage conditions whereas severe limits to arbitrage negatively affect momentum profits.

Keywords: international markets, government bonds, anomalies, limits to arbitrage, investor sentiment, return predictability

JEL Classification: G11, G12, G15

Suggested Citation

Zaremba, Adam and Szczygielski, Jan, Limits to Arbitrage, Investor Sentiment, and Factor Returns in International Government Bond Markets (April 23, 2018). Economic Research-Ekonomska Istraživanja, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3332923

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

HOME PAGE: http://adamzaremba.pl

Jan Szczygielski

Department of Financial Management, University of Pretoria ( email )

Physical Address Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

Department of Accounting and Financial Management,Newcastle Business School, Northumbria University

Newcastle Upon Tyne
Newcastle Upon Tyne, NE1 8ST
United Kingdom

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