Extending Fama–French Factors to Corporate Bond Markets

Abstract

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.

Comprehensive Analysis of Regulatory Impacts on Performance of Slovak Pension Funds

“…Repeated application of Fama and French five-factor variables to multifactor models has confirmed statistical significance of TERM and DEF variables. Similar results were achieved also by Bektić et al (2019) who studied extended Fama and French five-factor model on the European market and who has proved statistical significance of these factors. Since latest studies indicate low tracking error on the European markets, this manuscript has extended all analysed models by regulatory impact variables, but also by bond market factors TERM and DEF.…”

“…There is no correlation among bond market factors TERM and DEF and other variables. Correlation between these two variables as well as among other variables is low which has been proved by study of Bektić et al (2019). Addition of these two variables into models does not increase multicollinearity of these tested models.…”

“…Bond market factors have been described and analysed by Fama and French (1993) in their three-factor model but impact of these factors on portfolio performance has not been confirmed. Nevertheless, these factors have been used by Choi and Kim (2018) and Bektić et al (2019), who have extended the Fama and French five-factor model with variables describing returns from fixed income assets.…”

Navigating the Factor Zoo Around the World: An Institutional Investor Perspective

“…In addition to bond factors, a number of equity factors such as size, profitability, and asset growth also have predictive power for bond returns (Chordia Goyal et al 2017;Jostova et al 2013;Gebhardt et al 2005). Bektić et al (2019) find that the Fama and French (2015) size, value, profitability, and investment factors have explanatory power for returns of US high yield corporate bonds, but the relations are less pronounced for US and European investment grade bonds. Avramov et al (2019) show that investor sentiment and financial distress jointly drive bond and equity overpricing underlying market anomalies.…”

Navigating the factor zoo around the world: an institutional investor perspective

“…In addition to bond factors, a number of equity factors such as size, profitability, and asset growth also have predictive power for bond returns (Chordia Goyal et al 2017 ; Jostova et al 2013 ; Gebhardt et al 2005 ). Bektić et al ( 2019 ) find that the Fama and French ( 2015 ) size, value, profitability, and investment factors have explanatory power for returns of US high yield corporate bonds, but the relations are less pronounced for US and European investment grade bonds. Avramov et al ( 2019 ) show that investor sentiment and financial distress jointly drive bond and equity overpricing underlying market anomalies.…”