Fixed-Income Value Factor

The value effect is one of the most well-studied and evidenced market factors in equities. However, there has not been a widely accepted definition of the value factor in fixed income. In this article, the authors put forward their approach to the value factor by using a model-implied OAS framework to identify under- and overvalued securities. They evaluate the model with a highly controlled testing and reweighting mechanism to best preserve the credit, maturity, and industry characteristics to filter out the noise from undesired sources. Empirical results across various global corporate bond markets show that the value factor could unlock additional returns while accompanied by higher volatilities as a result of its cyclicality. The framework applied in the article can also be extended to test the effectiveness of other fixed income factors. TOPICS: Analysis of individual factors/risk premia, factor-based models, factors, risk premia