Factor Investing in Emerging Market Credits

Abstract

We examine factor investing in emerging market hard currency corporate bonds. Size, low-risk, value, and momentum factor portfolios obtain significantly higher Sharpe ratios than the market. We find the strongest results when the four factors are combined in a multi-factor portfolio. In several tests, alphas remain significant after controlling for exposures to developed market credit factors or equity factors. The factor portfolios benefit from bottom-up allocations to countries, sectors, ratings, and maturity segments, but most alphas remain significant after controlling for these allocation effects. Higher risk-adjusted returns of factor portfolios can also be found within liquid subsamples of the market.

Keywords: factor investing, corporate bonds, emerging markets

JEL Classification: G11, G12, G15