We provide empirical evidence that the Size, Low-Risk, Value and Momentum factors have economically meaningful and statistically significant risk-adjusted returns in the corporate bond market.
Since the factors capture different effects, a combined multi-factor portfolio halves the tracking error compared to the individual factors. The returns are up to three times larger than the market, and cannot be explained by risk or the equivalent equity factors. The results are robust to transaction costs, alternative factor definitions and the specific portfolio construction settings. Finally, allocating to corporate bond factors has added value beyond allocating to equity factors in a multi-asset context.
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