The explanatory power of size, value, profitability, and investment has been extensively studied for equity markets. Yet, the relevance of these factors in global credit markets is less explored, although equities and bonds should be related according to structural credit risk models. In this article, the authors investigate the impact of the four Fama–French factors in the US and European credit space. Although all factors exhibit economically and statistically significant excess returns in the US high-yield market, the authors find mixed evidence for US and European investment-grade markets. Nevertheless, they show that investable multifactor portfolios outperform the corresponding corporate bond benchmarks on a risk-adjusted basis. Finally, their results highlight the impact of company-level characteristics on the joint return dynamics of equities and corporate bonds.

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The low beta anomaly is well documented for equity markets. However, the existence of such a factor in corporate bond markets is less explored. I find that European corporate bonds of firms with a low equity beta have higher risk-adjusted returns, on average, than European corporate bonds of firms with a high equity beta. The results are economically and statistically significant as low beta credit portfolios improve the Sharpe ratio up to 30%. Moreover, even after accounting for transaction costs and by considering long-only portfolios, the risk-adjusted return remains substantial indicating practical implementability of the strategy for corporate bond investors. K E Y W O R D Sanomalies, corporate bonds, factor investing, low beta, risk premium | INTRODUCTIONAlthough the capital asset pricing model (CAPM) assumes a positive risk/return relation, there are numerous empirical studies which report that the relation between risk and return is flatter than implied by CAPM or even negative. One of the first and best documented anomalies in equity markets is the low beta anomaly. 1 For instance, Haugen and Heins (1972) and Black, Jensen, and Scholes (1972) show that a portfolio that is short high-beta stocks and long low-beta stocks generates significant positive abnormal returns. Recent research confirms these puzzling findings and tries to give an explanation for the existence of this kind of anomaly. Frazzini and Pedersen (2014) provide a model which suggests that investment constraints (e.g., leverage) and human behavior are the main drivers behind the low beta anomaly.However, while empirical research on anomalies is predominantly focused on equity markets, similar studies for corporate bonds are rather new. For example, Correia, Richardson, and Tuna (2012) document that value investing is useful for corporate bond investors. Jostova, Nikolova, Philipov, and Stahel (2013) show that credit momentum is profitable in the U.S. high yield (HY) corporate bond market. Choi and Kim (2016) suggest that asset growth and investment anomalies exist in credit markets and Chordia, Goyal, Nozawa, Subrahmanyam, and Tong (2017) provide evidence that size, profitability and past equity returns can predict corporate bond returns. In addition, Bekti c, Wenzler, Wegener, Schiereck, and Spielmann (2016) state that the four Fama and French (2015) equity factors (size, value, profitability and investment) exhibit significant excess returns in the U.S. HY market but the results are mixed for U.S. and European investment grade (IG) bonds. Finally, Lin, Wu, and Zhou (2017) document that momentum is the most pronounced cross-sectional corporate bond market anomaly using trend signals.Analyzing the relation between firm's equity beta and the corresponding corporate bond excess return is promising for corporate bond investors for at least the following two reasons. On one hand, according to structural credit risk models like Merton (1974), equities and bonds should be related since they represent claims against the assets of the same firm, an...

Factor investing has become very popular during the last decades, especially with respect to equity markets. After extending Fama–French factors to corporate bond markets, recent research more often concentrates on the government bond space and reveals that there is indeed clear empirical evidence for the existence of significant government bond factors. Voices that state the opposite refer to outdated data samples. By the documentation of rather homogeneous recent empirical evidence, this review underlines the attractiveness of more sophisticated investment approaches, which are well established in equity and even in corporate bond markets, to the segment of government bonds.