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Factor investing in Fixed-Income – defining and exploiting value in Sovereign Bond Markets

In this paper, “Factor Investing in Fixed-Income – Defining and Exploiting Value in Sovereign Bond Markets”, authors propose a definition of value in Treasury bonds that, we believe, is more satisfactory than definitions found in the recent literature, and that allows statistically significant and economically relevant predictions of cross-sectional excess returns. 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 our value signal is closely linked to Treasury market volatility, and they provide an explanation for this strong link using arguments similar to those that can be found in the recent literature on liquidity in Treasuries.