Effectiveness of a factor-based investment strategy in the France and Germany corporate bonds markets
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Journal Title
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Volume Title
School of Business |
Master's thesis
Authors
Date
2022
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
48
Series
Abstract
This thesis studies the effectiveness of the four well-documented factors Carry, Value, Low-risk, and Momentum in the France and Germany corporate bond markets between January 2013 and June 2022. These factors are defined using only bond-based characteristics and then utilized to construct corresponding factor portfolios. The effectiveness of a factor is tested by comparing a benchmark with its factor portfolio’s return outperformance, Sharpe ratio, and alphas from the CAPM and Fama-French-Carhart model. The Value and Momentum factors are found to be effective as they significantly outperform the benchmark. The Carry factor, while delivering the highest significant return outperformance (11.75%), does not deliver a significantly higher Sharpe ratio than that of the benchmark. The Low-risk factor is unexpectedly ineffective as its portfolio could not generate a significant positive return outperformance or higher Sharpe ratio. A multi-factor portfolio is found to be able to produce significant outperformance and lower risk compared to other factors. The study is not robust to a change in the holding period of the factor portfolios due to the low number of observations.Description
Thesis advisor
Puttonen, VesaKeywords
factor investing, corporate bond, carry, value, low-risk, momentum, asset pricing, factors