Factor Investing in the Corporate Bond Market

Patrick Houweling and Jeroen van Zundert

Financial Analysts Journal, 2017, vol. 73, issue 2, 100-115

Abstract: We offer empirical evidence that size, low-risk, value, and momentum factor portfolios generate economically meaningful and statistically significant alphas in the corporate bond market. Because the correlations between the single-factor portfolios are low, a combined multi-factor portfolio benefits from diversification among the factors: It has a lower tracking error and a higher information ratio than the individual factors. Our results are robust to transaction costs, alternative factor definitions, alternative portfolio construction settings, and constructing factor portfolios on a subsample of liquid bonds. Finally, allocating to corporate bond factors provides added value beyond allocating to equity factors in a multi-asset context.A practitioner's perspective on this article is provided in the In Practice piece "Corporate Bonds: Time for Factors?" by Phil Davis, online 13 February 2017.Disclosure:The views expressed in this article are the authors’ and do not necessarily reflect the views of Robeco Institutional Asset Management B.V. (“Robeco”). Editor’s Note:Submitted 11 December 2015Accepted 30 September 2016 by Stephen J. Brown

Date: 2017
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DOI: 10.2469/faj.v73.n2.1

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