Factor Investing in Credit
Posted: 23 Jan 2020 Last revised: 26 Mar 2021
Date Written: December 20, 2019
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: Suggested Citation