Factor Investing in Fixed-Income - Cross-Sectional and Time-Series Momentum in Sovereign Bond Markets

Looking at momentum in fixed-income markets at the security level is very important, because studies that employ ‘synthetic’ zero-coupon bonds can be vitiated by the well-known serial autocorre ...

Auteur(s) :

Jean-Michel Maeso

EDHEC-Risk Institute

Lionel Martellini

EDHEC-Risk Institute

Riccardo Rebonato

EDHEC-Risk Institute

Looking at momentum in fixed-income markets at the security level is very important, because studies that employ ‘synthetic’ zero-coupon bonds can be vitiated by the well-known serial autocorrelation of pricing errors, which can masquerade as a momentum effect. To our knowledge, no empirical study of momentum in Treasuries has looked at the problem at this level of granularity.

In this paper, “Factor Investing in Fixed-Income – Cross-Sectional and Time-Series Momentum in Sovereign Bond Markets”, we undertake a systematic, security-level analysis of momentum and reversal strategies in US Treasuries covering more than 40 years of data. We distinguish between what we call ‘market’ and ‘self’ time-series momentum (reversal) strategies, and present an exact identity between these two time-series and the cross-sectional momentum (reversal) strategies. This identity helps us identify the sources of profitability of the various strategies, and raises interesting question regarding the contribution of the first and second principal components of yield changes.

We find that there exist look-back and investment periods for which momentum times series strategies (both ‘self’ and ‘market’) give rise to statistically and economically significant positive Sharpe ratios. We also find that, after adjusting for duration, the reversal cross-sectional strategy has even larger Sharpe ratios, and is profitable over a wider range of look-back and investment periods. We argue that the explanation for this finding is related to the mean reverting properties of the yield-curve slope. 

Finally, we show that the duration-adjusted reversal cross-sectional strategy can be successfully implemented in a long-only fashion.

Type : Publication EDHEC
Date : le 27/06/2019
Pôle de recherche Finance

A voir également

Du campus de l’EDHEC au barreau de New York
Actualités
- 29-05-2020
Qu’est-ce qui vous a motivé à intégrer la filière Business Law & Management de l’...
Rencontre avec Valentin Grinner, étudiant en Pré-Master
Actualités
- 28-05-2020
Valentin Grinner “J’ai commencé un MOOC pour apprendre les bases du développement web”...
Classement des Grandes Ecoles de Commerce - Le Parisien 2020
Actualités
- 26-05-2020
L’EDHEC : 4ème Grande Ecole Française Avec une présence remarquée et constante dans les...
Rencontre avec Marie Thollet, étudiante en année de césure
Actualités
- 20-05-2020
  Marie Thollet “ L’avant ne sera pas si différent de l’après covid19 ” Marie est en...