Factor investing entails allocating to systematic strategies that historically have shown a higher Sharpe ratio than the market. Well-known factors are Value, Momentum, Size, Quality, and Low-Risk. Most of the research on factor investing has been conducted on equity markets. In more recently years, both in the academic literature and in investment strategies, factor investing in corporate bond markets has started to gain attention. With almost 20 years of experience in theory and practice, Robeco is recognized as one of the thought leaders in this field.
The goal of this internship project is to start from a simple, yet proven credit risk measure, known as DTS, and extend it with other bond characteristics, such as regions, sectors, etc. You will conduct a literature study and design a credit risk model that can be used for integrated risk management of factor-based investment strategies. To properly measure and manage risks of a credit investment strategy, one needs identify risk factors and estimate their volatility and correlations. The challenge of this project lies in estimating a large number of uncertain parameters. Shrinkage is an often used method to limit the amount of estimation error.
Bai, Bali, Wen, 2018, “Common Risk Factors in the Cross-Section of Corporate Bond Returns”, Journal of Financial Economics
Ben Dor, Dynkin, Hyman, Houweling, van Leeuwen, Penninga, 2007, “DTS (Duration Times Spread): A New Measure of Spread Exposure in Credit Portfolios”, Journal of Portfolio Management
Houweling, van Zundert, 2017, “Factor Investing in Corporate Bonds”, Financial Analysts Journal
Israel, Kang, Richardson, 2018, “Investing with Style in Corporate Bonds”, Journal of Investment Management