EDHEC-Risk Institute has launched a research programme that aims to broaden the concepts of factor investing in bond markets. This is in response to the substantial research available on factor investing in equity products and the scarcity of research on the existence of risk premia in fixed income.
EDHEC analyses the risk factors that drive universes, determine whether they attract compensation and more generally examine bond return predictability.
A recent study carried out by EDHEC and Amundi as part of the research chair on ETF, Indexing and Smart Beta Investment Strategies. The study named Factor Investing in Sovereign Bond Markets – A Time-Series Perspective focuses on two factors in bond returns, the level and slop of the yield curve.
The study made three conclusions:
-Long term bonds appear to offer a higher unconditional excess return over short-term rates
-A conditional version of a carry strategy based upon a time-varying exposure to the level of the yield curve can generate up to 200 basis points of excess performance
-A conditional version of a flattener strategy based upon a time-varying exposure to the slope of the yield curve can generate economically-significant additional performance, even though such excess performance is limited
Riccardo Rebonato (pictured), professor of finance, EDHEC-Risk Institute, at EDHEC Business School, commented: “Equity markets are notoriously difficult to time, but, as the factor literature has shown us for over 20 years, lend themselves to relative positioning.
"Treasury markets are, in a sense, their mirror image: relative trading is possible, but hard. However, evidence is mounting that new-generation factors can allow the timing of duration and slope exposure. This is an exciting new field, in which EDHEC-Risk Institute ambitions to position itself as a thought leader."
The authors of the study Jean-Michel Maeso, Lionel Martellini and Riccardo Rebonato are releasing two further companion pieces in June. The papers present a related analysis of the two popular cross-sectional factors, value and momentum, using economically justified proxies for these attributes.