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The Journal of Fixed Income

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Article

Fixed-Income Value Factor

Shawn Shen, Arom Pathammavong and Alex Chen
The Journal of Fixed Income Summer 2019, 29 (1) 21-43; DOI: https://doi.org/10.3905/jfi.2019.1.067
Shawn Shen
is vice president, Benchmarks, at FTSE Russell in Hong Kong
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Arom Pathammavong
is managing director, APAC Head of Benchmarks, at FTSE Russell in Hong Kong
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Alex Chen
is associate director, Research and Analytics, at FTSE Russell in Hong Kong
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Abstract

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

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The Journal of Fixed Income: 29 (1)
The Journal of Fixed Income
Vol. 29, Issue 1
Summer 2019
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Fixed-Income Value Factor
Shawn Shen, Arom Pathammavong, Alex Chen
The Journal of Fixed Income Jun 2019, 29 (1) 21-43; DOI: 10.3905/jfi.2019.1.067

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Fixed-Income Value Factor
Shawn Shen, Arom Pathammavong, Alex Chen
The Journal of Fixed Income Jun 2019, 29 (1) 21-43; DOI: 10.3905/jfi.2019.1.067
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  • Article
    • Abstract
    • PAST APPROACHES TO VALUE IN CREDIT MARKETS
    • A PARSIMONIOUS MODEL TO DETERMINE THE VALUE FOR CORPORATE BONDS
    • CHARACTERISTICS AND BEHAVIOR OF THE FIXED-INCOME VALUE EFFECT
    • DATA
    • CROSS-SECTIONAL REGRESSION MODEL
    • DECILING AND REWEIGHTING
    • VALUE FACTOR IN THE US INVESTMENT-GRADE CORPORATE BOND MARKET
    • EX ANTE VOLATILITY ADJUSTMENT
    • RISK CHARACTERISTICS AND INDUSTRY BREAKDOWN
    • ATTRIBUTION OF THE EXCESS RETURN OF THE VALUE INDEX
    • ASSESSMENT OF THE VALUE FACTOR’S PREDICTION POWER
    • PRACTICAL IMPLEMENTATION CONSIDERATIONS
    • EMPIRICAL RESULTS IN GLOBAL CORPORATE BOND MARKETS
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • REFERENCES
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  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

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