Written on 12 September 2019.
Their value pricing factor exploits the differences between the market and the theoretical values of Treasury bonds, where the theoretical value is assessed using an economically-justifiable Gaussian dynamic term structure model. Authors show that the profitability of the strategy they build using their value signal is statistically and economically significant and is closely linked to the Treasury market volatility.
They provide an explanation for this strong link using arguments similar to what can be found in the recent literature on liquidity in Treasuries; and they show that their value signal is not subsumed by the best-known return-predicting factors. With an eye to practical applications, they also present a long-only version of their strategy.
You can access here the complete EDHEC-Risk Institute publication version of "Factor Investing in Fixed-Income – Defining and Exploiting Value in Sovereign Bond Markets".
TOPICS: Analysis of individual factors/risk premia, factor-based models, style investing #factorinvesting #fixedincome #riskpremia #treasurybonds
Jean-Michel Maeso has been a senior quantitative researcher at EDHEC-Risk Institute since October 2015. Previously, he spent 5 years in the financial industry specialising in research, development and implementation of investment solutions (structured products and systematic strategies) for institutional investors. He holds an engineering degree from the Ecole Centrale de Lyon with a specialisation in applied mathematics.
Lionel Martellini is a Professor of Finance at EDHEC Business School and the Director of EDHEC-Risk Institute. He is a former member of the faculty at the Marshall School of Business, University of Southern California, and has been a visiting fellow at the Operations Research and Financial Engineering department at Princeton University. Professor Martellini conducts research in a broad range of topics related to investment solutions for individual and institutional investors, equity and fixed-income portfolio construction, risk management and derivatives valuation. His work has been published in leading academic and practitioner journals and has been featured in major European and global dailies such as The Economist, The Financial Times and The Wall Street Journal. Professor Martellini has served as a consultant for large institutional investors, investments banks and asset management firms on a number of questions related to risk and asset allocation decisions, and is a regular speaker in seminars and conferences on these subjects.
Riccardo Rebonato is Professor of Finance at EDHEC-Risk Institute, EDHEC Business School was previously Global Head of Rates and FX Research at PIMCO. He also served as Head of Front Office Risk Management and Head of Clients Analytics, Global Head of Market Risk and Global Head of Quantitative Research at Royal Bank of Scotland (RBS). Prior to joining RBS, he was Head of Complex IR Derivatives Trading and Head of Derivatives Research at Barclays Capital. Riccardo Rebonato has served on the Board of ISDA (2002-2011), and has been on the Board of GARP since 2001. He was a visiting lecturer in Mathematical Finance at Oxford University (2001-2015). He is the author of several books, in particular having published extensively on interest rate modelling, risk management, and most notably books on SABR/LIBOR Market Model pricing of interest rate derivatives, as well as on the use of Bayesian nets for stress testing and asset allocation. He has published articles in international academic journals such as Quantitative Finance, the Journal of Derivatives and the Journal of Investment Management, and has made frequent presentations at academic and practitioner conferences.