Factor Investing in Corporate Bond Markets: Enhancing Efficacy Through Diversification and Purification!

Forthcoming The Journal of Fixed Income

Posted: 22 Aug 2019 Last revised: 6 Sep 2019

See all articles by Thomas Heckel

Thomas Heckel

BNP Paribas Asset Management

Zine Amghar

BNP Paribas Asset Management

Isaac Haik

BNP Paribas Asset Management

Olivier Laplenie

BNP Paribas Asset Management

Raul Leote de Carvalho

BNP Paribas Asset Management

Date Written: August 20, 2019

Abstract

We show that factors from value, quality, low risk and momentum styles play an important role in explaining the cross-section of corporate bond expected returns for the U.S. and Euro Investment Grade and U.S. BB-B non-Financial High Yield universes. We demonstrate the importance of purifying factor data by neutralizing a number of risk biases that are present in the factors: controlling for sectors, option-adjusted spread (OAS), duration and size biases significantly increases the predictive power of style factors. We propose a new simple approach for efficiently neutralizing the biases from multiple risk variables and demonstrate its superiority relative to stratified sampling and optimization as alternative control methods. We also measure the added value from diversifying the number of factors in each style. Finally, we show that the results are robust in relation to transaction costs and can be used to design strategies that aim at outperforming traditional benchmark indexes.

Keywords: factor investing, smart beta, corporate bonds, credit, factor premiums, high yield, investment grade, low-risk, value, momentum, quality

JEL Classification: G11, G12, G14, E44

Suggested Citation

Heckel, Thomas and Amghar, Zine and Haik, Isaac and Laplenie, Olivier and Carvalho, Raul Leote de, Factor Investing in Corporate Bond Markets: Enhancing Efficacy Through Diversification and Purification! (August 20, 2019). Forthcoming The Journal of Fixed Income. Available at SSRN: https://ssrn.com/abstract=3440085 or http://dx.doi.org/10.2139/ssrn.3440085

Thomas Heckel

BNP Paribas Asset Management ( email )

Paris
France

Zine Amghar

BNP Paribas Asset Management ( email )

14 rue bergere
Paris, 75009
France
0033158972784 (Phone)

Isaac Haik

BNP Paribas Asset Management ( email )

Paris
France

Olivier Laplenie

BNP Paribas Asset Management ( email )

Paris
France

Raul Leote de Carvalho (Contact Author)

BNP Paribas Asset Management ( email )

14 rue Bergere
Paris, 75009
France
0033158972183 (Phone)

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