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 paper, we put forward our approach to the factor by utilizing a model-implied OAS framework to identify under and over-valued securities. We evaluate the model with a highly controlled testing and reweighting mechanism to best preserve the credit, maturity and industry characteristics in order 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 at the same time accompanied by higher volatilities due to its cyclicality. The framework applied in this paper can also be extended to test the effectiveness of other fixed income factors