Factor Investing in Credit

Posted: 23 Jan 2020 Last revised: 26 Mar 2021

See all articles by Harald Henke

Harald Henke

Quoniam Asset Management GmbH

Hendrik Kaufmann

Deka Investment GmbH

Philip Messow

Robeco Asset Management

Jieyan Fang-Klingler

Quoniam Asset Management GmbH

Date Written: December 20, 2019

Abstract

This paper investigates the application of factor investing in corporate bonds. Our results show that proficiency in the drivers of risk and return, the factors, should be used for bottom-up corporate bond selection. We analyze five different factors (Value, Equity Momentum, Carry, Quality, Size) and their combinations within the USD investment grade (IG) and high yield (HY) markets. These factors have positive risk-adjusted returns and explain a significant portion of the cross-sectional variation in corporate bond excess returns. We find evidence that factor combinations are superior to single factors in risk-adjusted terms. Multifactor as a signal blending strategy is particularly suitable for active approaches targeting high alpha, while portfolio blending is better aligned with more passive strategies, targeting low turnover and low tracking error.

Keywords: factor investing, corporate bonds, factor premiums, size, quality, momentum, value, carry

JEL Classification: G11, G12, G14

Suggested Citation

Henke, Harald and Kaufmann, Hendrik and Messow, Philip and Fang-Klingler, Jieyan, Factor Investing in Credit (December 20, 2019). Available at SSRN: https://ssrn.com/abstract=3512761 or http://dx.doi.org/10.2139/ssrn.3512761

Harald Henke

Quoniam Asset Management GmbH ( email )

Frankfurt
Germany

Hendrik Kaufmann

Deka Investment GmbH ( email )

Mainzer Landstraße 16
Frankfurt, DE 60325
Germany

HOME PAGE: http://www.deka.de

Philip Messow (Contact Author)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Jieyan Fang-Klingler

Quoniam Asset Management GmbH ( email )

Frankfurt
Germany

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