Systematic Investing in Credit E-Book

Arik Ben Dor

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Frank J. Fabozzi Series
• Sprache: Englisch

Seitenzahl: 1096

Veröffentlichungsjahr: 2020

Beschreibung

The Latest Insights on Systematic Strategies for Investing in Credit Systematic Investing in Credit is the latest book of cutting-edge research in credit markets written by the Quantitative Portfolio Strategy (QPS) Group at Barclays Research. The book starts with empirical evidence that credit, as an asset class, has consistently outperformed a risk-matched combination of equities and Treasuries. A detailed analysis explains the sources of this advantage. Credit portfolio construction was for decades, and often still is, an index-centric process subjecting managers to index rules and constraints. Barclays QPS Group proceeds by discussing the performance cost of these constraints and ways to exploit resulting inefficiencies to outperform indices. Next they present their research on the performance implications of bond portfolio characteristics - both traditional ones such as coupon level and maturity distribution and others that came into focus more recently such as ESG scores. The following part of the book is dedicated to the increasingly popular factor investing in credit. They discuss their original value and momentum models (the latter based on the momentum of the equity of a given issuer) as well as the issuer size factor. They analyze optimal ways of combining the factor signals in a portfolio considering turnover limits and trading costs in a practical implementation. Finally, they focus on the newest trend in credit investing - the applications of equity market data and methodologies in credit portfolio construction. Investors will learn: * How to capitalize on index inefficiencies. * How to analyze implications of portfolio characteristics (ESG, Coupon, Maturity) * How to systematically apply factor investing in credit (Value, Momentum, Size) * How to use equity-related data and methodologies to enhance credit portfolio performance

Leseprobe

Table of Contents

Cover

Title Page

Copyright

Dedication

Acknowledgments

Foreword

Preface

NOTE

Introduction

PART One: Investing in Credit vs. Investing in a Combination of Treasuries and Equities

CHAPTER 1: Can a Combination of Treasuries and Equities Replace Credit in a Portfolio?

INTRODUCTION

BENEFIT OF CREDIT IN AN ASSET ALLOCATION CONTEXT

CAN A CORPORATE BOND BE REPLICATED BY TREASURIES AND SAME‐ISSUER EQUITY?

RISK MATCHING USING ALTERNATIVE APPROACHES

DRIVERS OF CREDIT NONREPLICABLE RETURNS COMPONENT

CONCLUSION

REFERENCES

APPENDIX 1.1

APPENDIX 1.2

APPENDIX 1.3

NOTES

PART Two: Capitalizing on Index Inefficiencies

Fallen Angels: Index Liquidation

CHAPTER 2: Fallen Angels Characteristics, Performance, and Implications for Investors

INTRODUCTION

DATA AND METHODOLOGY

PERFORMANCE DYNAMICS AROUND RATING EVENTS

INVESTING IN FALLEN ANGELS AS A STRATEGY

SUMMARY

REFERENCES

NOTES

CHAPTER 3: Fallen Angels: Capacity, Transaction Costs, and the Bond‐CDS Basis

INTRODUCTION

REVISITING THE PERFORMANCE OF FALLEN ANGELS

CAPACITY AND COST OF IMPLEMENTING A FALLEN ANGELS STRATEGY

TRADING THE BOND‐CDS BASIS OF FALLEN ANGELS

SUMMARY

REFERENCES

NOTES

CHAPTER 4: Introducing the Fallen Angel Reversal Scorecard

INTRODUCTION

CONSTRUCTING FAR SCORES

EFFICACY OF FAR SCORE

CONCLUSION

REFERENCES

NOTES

New Issuance: Index Inclusion

CHAPTER 5: Issuance Dynamics and Performance of Corporate Bonds

INTRODUCTION

DEBT ISSUANCE AND CREDIT PERFORMANCE

SECTOR WEIGHTS DYNAMICS AND INDEX PERFORMANCE

DO AGGRESSIVE ISSUERS TEND TO UNDERPERFORM?

POSSIBLE DEPARTURES FROM MARKET WEIGHTS IN THE INDEX

CONCLUSION

REFERENCES

ENDNOTES

CHAPTER 6: The Value of Waiting to Buy: Inclusion‐Delay Investment‐Grade Corporate Indices

INTRODUCTION

BID‐PRICE ADJUSTMENT OF IG CORPORATE INDEX

INCLUSION‐DELAY IG CORPORATE INDICES

DRIVER OF DELAY INDEX PERFORMANCE: ISSUANCE DYNAMICS

COMPONENTS OF DELAY‐INDEX OUTPERFORMANCE

INCLUSION‐DELAY INDICES AS AN ALTERNATIVE TO THE IG CORPORATE INDEX

REFERENCES

NOTES

CHAPTER 7: Concessions in Corporate Bond Issuance: Magnitude, Determinants, and Post‐Issuance Dynamics

INTRODUCTION

DATA AND METHODOLOGY

DETERMINANTS OF CONCESSIONS

CONCLUSION

REFERENCES

NOTES

Performance Cost of Investment Constraints

CHAPTER 8: “Try‐and‐Hold” Credit Investing

INTRODUCTION

PURE BUY‐AND‐HOLD APPROACH

TRY‐AND‐HOLD MODEL

PREDICTIVE POWER OF SPREADS

ENHANCED TRY‐AND‐HOLD MODEL

CONCLUSION

REFERENCES

NOTES

CHAPTER 9: Effect of Rating‐Based Stop‐Loss Rules on Performance

INTRODUCTION

EFFECTS OF RATING STOP‐LOSS RULES IN USD CREDIT

EXPLAINING THE PERFORMANCE DROP

CHARACTERISTICS OF DOWNGRADED BONDS

EFFECTS OF RATING STOP‐LOSS RULES IN NON‐USD CREDIT MARKETS

CONCLUSION

APPENDIX 9.1

REFERENCES

NOTES

PART Three: Performance Implications of Portfolio Characteristics

CHAPTER 10: Coupon Effects in Corporate Bonds: Pricing, Empirical Duration, and Spread Convexity

INTRODUCTION

WHY SHOULD PRICE LEVEL MATTER?

DO PREMIUM CORPORATES HAVE HIGHER SPREADS?

HOW DOES COUPON LEVEL AFFECT EMPIRICAL DURATION?

DO DISCOUNT CORPORATES OUTPERFORM?

CONCLUSION

REFERENCES

NOTES

CHAPTER 11: Maturity Dependence of Corporate Bond Excess Returns

INTRODUCTION

PERFORMANCE BY MATURITY BUCKET

ATTRIBUTING PERFORMANCE

CONCLUSION

REFERENCES

NOTES

CHAPTER 12: ESG Investing in Credit

INTRODUCTION

ASSEMBLING A DATASET OF ESG RATINGS AND BOND RETURNS

CHARACTERISTICS OF ESG SCORES

EFFECT OF ESG ON PORTFOLIO PERFORMANCE IN IG MARKETS

EFFECT OF ESG ON BOND VALUATION

FOCUSING ON THE US HIGH‐YIELD MARKET

CONCLUSION

APPENDIX 12.1

REFERENCES

NOTES

PART Four: Factor Investing in Credit

Value Investing

CHAPTER 13: Relative Value Investing in Credit Using Excess Spread to Peers

INTRODUCTION

FORMING RELATIVE VALUE SCORES

PERFORMANCE OF RELATIVE VALUE INVESTING

IMPLEMENTING A RELATIVE VALUE STRATEGY

TRACKING PORTFOLIOS BASED ON RELATIVE VALUE

STATISTICAL ANALYSIS OF THE VALUE PREMIUM

CONCLUSION

APPENDIX 13.1

REFERENCES

NOTES

CHAPTER 14: Long‐Horizon Value Investing in Credit Using Spread per Unit of Debt‐to‐Earnings Ratio

INTRODUCTION

DATA AND SAMPLE CONSTRUCTION

UNDERSTANDING THE SPIDER MEASURE

UNDERSTANDING THE SPIDER PERFORMANCE

IMPLEMENTING SPiDER IN PRACTICE

CONCLUSION

REFERENCES

NOTES

Momentum Investing

CHAPTER 15: Equity Momentum in Credit

INTRODUCTION

EQUITY MOMENTUM IN CREDIT

CHARACTERISTICS OF THE EMC STRATEGY

EMC STRATEGY RETURNS IN DIFFERENT MARKET ENVIRONMENTS

IS EMC A LIQUIDITY PHENOMENON?

COMBINING EQUITY MOMENTUM WITH RELATIVE VALUE

CONCLUSION

APPENDIX 15.1

APPENDIX 15.2

REFERENCES

NOTES

CHAPTER 16: Corporate Sector Timing Using Equity Momentum

INTRODUCTION

ATTRIBUTING PERFORMANCE OF THE EMC STRATEGY

EQUITY MOMENTUM IN CORPORATE SECTOR TIMING

CONCLUSION

NOTES

Size Effect

CHAPTER 17: Issuer Size Premium in Credit Markets

INTRODUCTION

ISSUER SIZE IN THE US CORPORATE BOND MARKET

CORPORATE BOND PORTFOLIOS SORTED ON SIZE

ESTIMATING SIZE SPREAD PREMIUM

PERFORMANCE OF EXPOSURE‐MATCHED SIZE PORTFOLIOS

CONCLUSION

APPENDIX 17.1

REFERENCES

NOTES

Combining Factor Strategies

CHAPTER 18: Integrating Systematic Strategies into Credit Portfolio Construction

INTRODUCTION

RELATIVE VALUE AND EQUITY MOMENTUM STRATEGIES IN CREDIT

MEASURING LIQUIDITY AND TRANSACTION COSTS WITH BARCLAYS LIQUIDITY COST SCORES

STRATEGY PORTFOLIOS WITH TURNOVER BUFFERS

STRATEGY PORTFOLIOS WITH TURNOVER BUDGETS

CONCLUSION

APPENDIX 18.1

REFERENCES

NOTES

CHAPTER 19: OneScore : Combining Quantitative and Fundamental Views in Credit

INTRODUCTION

ONESCORE METHODOLOGY

PERFORMANCE OF ONESCORE

ONESCORE AND SYSTEMATIC CREDIT FACTORS DURING MARKET DRAWDOWNS

CONCLUSION

NOTES

PART Five: Using Equity‐Related Data, Dynamics, and Instruments

CHAPTER 20: Does the Post‐Earnings‐Announcement‐Drift Extend to Credit Markets?

INTRODUCTION

DATA AND METHODOLOGY

IS PEAD PRESENT IN CORPORATE BONDS?

UNDERSTANDING PEAD DYNAMICS

CAN INVESTORS BENEFIT FROM PEAD DYNAMIC IN PRACTICE?

CONCLUSION

REFERENCES

NOTES

CHAPTER 21: Equity Short Interest as a Signal for Credit Investing

INTRODUCTION

LENDING DATA AND SAMPLE CONSTRUCTION

TIME‐SERIES AND CROSS‐SECTIONAL CHARACTERISTICS OF ESI

INDEX‐REPLICATING PORTFOLIOS WITH AN ESI TILT

INCORPORATING SHORT INTEREST FROM THE CORPORATE BOND MARKET

ESI AND RELATIVE VALUE IN CREDIT

CONCLUSION

APPENDIX 21.1

REFERENCES

NOTES

Index

End User License Agreement

List of Tables

Chapter 1

TABLE 1.1 Percentage of Bloomberg Barclays US Indices Included in the Sample ...

TABLE 1.2 Pre‐Formation Average Sensitivities

TABLE 1.3 Post‐Formation Portfolio Return Sensitivities

TABLE 1.4 Performance of Bond‐over‐Replication Portfolios

TABLE 1.5 Bond vs. Volatility‐Matched Equity/Treasury Portfolio Performance

TABLE 1.6 Summary Statistics of Merton Hedge Ratios by Rating

TABLE 1.7 Portfolio Performance and Risk Sensitivities using Analytical vs. E...

TABLE 1.8 Regression Coefficients of Bond‐over‐Replication Portfolio Monthly ...

TABLE 1.9 Size of Corporate Bonds vs. Option Markets

TABLE 1.10 Performance Statistics of Bond vs. Replication Portfolio (Using Tr...

TABLE 1.11 Mapping Coverage and Portfolio Performance in European Markets

TABLE 1.12 Percentage of Positive Pairwise Return Differences (Bond‐over‐Risk...

TABLE 1.13 Summary Statistics and Regression Results of Pairwise Volatility R...

TABLE 1.14 Performance of Bond over Replication Portfolio for S&P 500 Subsamp...

TABLE 1.15 Performance of Bond over Replication Portfolios by LCS Ranking

TABLE 1.16 Transaction Costs and Net Performance

TABLE 1.17 Performance Statistics of Bond‐over‐Replication Portfolio Return D...

TABLE 1.18 Portfolio Performance Adjusted for Autocorrelations in Volatilitie...

Chapter 2

TABLE 2.1 Issuer Population and Market Value by Year and Rating Event Type

TABLE 2.2 Distribution of Beginning and Ending Credit Qualities in Rating Eve...

TABLE 2.3 Status of Bonds 24 Months after the Rating Event

TABLE 2.4 Quarterly Average and Cumulative Relative Returns around Rating Eve...

TABLE 2.5 Cross‐Sectional Regressions of Fallen Angels Performance

TABLE 2.6 Bond Inclusion/Exclusion Criteria by Portfolio

TABLE 2.7 Portfolio Composition Summary Statistics

TABLE 2.8 Distribution of Bonds Sales by Exclusion Triggers

TABLE 2.9 Performance of Fallen Angels Portfolios

TABLE 2.10 Performance of “3‐Month Reversal” Portfolio over Peer Group with A...

Chapter 3

TABLE 3.1 Post‐Downgrade Relative Performance of Fallen Angels by Period

TABLE 3.2 Issuer Population and Market Value of Fallen Angels by Year in the ...

TABLE 3.3 Quarterly Average and Cumulative Relative Returns of Euro Issuers D...

TABLE 3.4 Performance of Mean Reversion Portfolios Using High−Yield Bonds vs....

TABLE 3.5 Annual Default Rates in the Bloomberg Barclays High Yield Index by ...

TABLE 3.6 Performance of Buy All and Three−Month Reversal Strategies by Portf...

TABLE 3.7 Effect of Transaction Costs on Performance of Fallen Angels Strateg...

TABLE 3.8 Annual Population and Market Value of Matched CDS‐Bond Sample

TABLE 3.9 Spreads of Bonds and CDS at Downgrade Month by Year (bp)

TABLE 3.10 Distribution of Market‐Adjusted Cash–CDS Basis by Year

TABLE 3.11 Industry Distribution by Basis on Downgrade

TABLE 3.12 Cash–CDS Basis Investment Strategy Formulation

TABLE 3.13 Portfolio Composition and Performance Statistics for Bond‐CDS Basi...

TABLE 3.14 Trade Statistics for Bond and Basis Investors in Delphi Automotive...

Chapter 4

TABLE 4.1 Real‐Time Predictor Variable

Pre‐Reversal

vs. Ex Post Stages...

TABLE 4.2 Change in Relative Turnover in Inflection Months vs. Noninflection ...

TABLE 4.3 Probability of Inflection by Groups of Change in Relative Turnover

TABLE 4.4 Sensitivities of Subsequent Relative Spread Change to Relative OAS/...

TABLE 4.5 Construction of Fallen Angel Reversal Score

TABLE 4.6 Return over Peers of Top over Bottom Sorted on Relative Scores

TABLE 4.7 Distribution of Monthly Allocation to Fallen Angels Overweight

TABLE 4.8 Performance of Fallen Angel‐Tilted High‐Yield Portfolios

Chapter 5

TABLE 5.1 Market Structure of the US Corporate All Ratings, 31 July 2014

TABLE 5.2 Differences in Average Excess Returns Between Bottom and Top Issuan...

TABLE 5.3 Contribution of Dynamic Sector Weights to Index Performance

TABLE 5.4 Performance Statistics of Moderate (Mod.) and Aggressive (Aggres.) ...

TABLE 5.5 Returns per Unit of DTS for Different Issuer Categories, August 199...

TABLE 5.6 Alternative Sector Weighting‐Comparative Statistics, February 1994–...

TABLE 5.7 Numerical Examples of Contrarian Issuer Weighting

TABLE 5.8 Contrarian vs. Market Issuer Weighting in US Corp All Ratings, Febr...

Chapter 6

TABLE 6.1 USD IG Corporate Index Returns, Offer‐to‐Bid and Bid‐to‐Bid Pricing...

TABLE 6.2 USD IG Long Corporate Index Returns, Offer‐to‐Bid and Bid‐to‐Bid Pr...

TABLE 6.3 USD IG Corporate Index Total and Excess Returns, Various Delay Indi...

TABLE 6.4 USD IG Long Corporate Index Excess Returns, Various Delay Indices, ...

TABLE 6.5 Clean Zero‐Month Delay, Young & Clean, and 24‐Month Delay US IG Cor...

TABLE 6.6 Excess Returns (bp/m) of Clean Zero‐Month Delay, Young & Clean, and...

TABLE 6.7 Average Monthly Excess Return Difference and Return Components, 24‐...

Chapter 7

TABLE 7.1 Comparison of Concession Databases

TABLE 7.2 Descriptive Statistics for Concession Datasets

TABLE 7.3 Supply‐Side Drivers of Concessions

TABLE 7.4 Demand Side Drivers of Concessions

TABLE 7.5 Concession Size by Issuance Characteristic

TABLE 7.6 Estimated Regression Coefficients for Drivers of Issuer Concessions

TABLE 7.7 Economic Significance of Concession Drivers

TABLE 7.8 Predicting Concessions Using the Regression Coefficients

TABLE 7.9 Simulated Alpha with Skill

Chapter 8

TABLE 8.1 Pure Buy‐and‐Hold Analysis of Expected Default Loss over a Five‐Yea...

TABLE 8.2 Example of the Try‐and‐Hold Approach: Loss Distribution for a Five‐...

TABLE 8.3 Try‐and‐Hold Loss Distribution for a Five‐Year, Baa‐Rated Bond, ove...

TABLE 8.4 Try‐and‐Hold Analysis of Risk and Return over a Five‐Year Horizon, ...

TABLE 8.5 One‐Year Transition Matrices Calculated Empirically Based on Data f...

TABLE 8.6 Ratios of Downgrade Frequencies and Spreads in “High” and “Low” Dow...

Chapter 9

TABLE 9.1 Average Spread of US Corporate Bonds by Rating and Moody's One‐Year...

TABLE 9.2 Return and Risk of Corporate Bond Portfolios Incepted in December 1...

TABLE 9.3 Average Return and Risk of Financial and Nonfinancial Corporate Bon...

TABLE 9.4 Average Return and Risk of Corporate Portfolios with Inception Date...

TABLE 9.5 Risk and Return of Rule‐Based Portfolios Incepted in December 1992 ...

TABLE 9.6 Performance of BH Portfolios vs. Performance of Downgraded (DG) Bon...

TABLE 9.7 Average Excess Return and Volatility of Euro Corporate Portfolios I...

TABLE 9.8 Average Excess Return and Volatility of Sterling Corporate Portfoli...

TABLE 9.9 Percentage Change in Return and Volatility Due to Rating Stop−Loss ...

Chapter 10

TABLE 10.1 Spreads of Four Verizon bonds as of April 28, 2014

TABLE 10.2 Results of Regression Models for Yield Sensitivity, With and Witho...

TABLE 10.3 Illustration of Coupon Effect on Empirical Hedge Ratios for Premiu...

TABLE 10.4 Performance of Discount vs. Premium Portfolios, Bottom‐up (Issuer‐...

TABLE 10.5 Performance of Discount vs. Premium Portfolios Partitioned by Trea...

TABLE 10.6 Performance of Discount vs. Premium Portfolios Partitioned by Exce...

TABLE 10.7 Performance of Discount vs. Premium Portfolios Partitioned by Quar...

TABLE 10.8 Performance of Discount vs. Premium Portfolios, Partitioned by Qua...

Chapter 11

TABLE 11.1 Performance of US Investment‐Grade Maturity Buckets in Five‐Year S...

TABLE 11.2 Characteristics and Performance Attribution of US IG Corporate Mat...

TABLE 11.3 Characteristics of Maturity Subsets of the US IG Corporate Index o...

TABLE 11.4 Characteristics and Performance Attribution of A‐Rated and Baa‐Rat...

Chapter 12

TABLE 12.1 Coverage of US IG, Euro IG, and US HY Bond Index Universe by Provi...

TABLE 12.2 Transition Frequencies Across ESG Tiers on a One‐Year Horizon, 200...

TABLE 12.3 Average Differences in Characteristics Between High‐ and Low‐ESG P...

TABLE 12.4 Average ESG Score by Country of Domicile of the Issuer, 2009 to 20...

TABLE 12.5 Return Difference Between Portfolios with High ESG Scores over Sim...

TABLE 12.6 Return Difference (in bp/Month) Between Portfolios with High ESG S...

TABLE 12.7 Return Difference (in bp/Month) Between Portfolios with High ESG S...

TABLE 12.8 Example Spread Attribution to ESG in the US IG Market at the End o...

TABLE 12.9 Average Spread Premium (bp) in the US IG and Euro IG Markets, 2009...

TABLE 12.10 Average Differences in Characteristics Between High‐ and Low‐ESG ...

TABLE 12.11 Return Difference between Portfolios with High ESG Scores over Si...

TABLE 12.12 Example Regression Analysis of Monthly Returns Controlling for Sp...

TABLE 12.13 Average (2009–2018) Regression Coefficients of IG Bond Returns on...

TABLE 12.14 Average (2012–2018) Regression Coefficients of US HY Bond Returns...

Chapter 13

TABLE 13.1 Performance of ESP Decile Portfolios With and Without Controlling ...

TABLE 13.2 Transition Frequencies of Bond ESP Scores Across ESP Deciles over ...

TABLE 13.3 Performance of Relative Value ESP Portfolios

TABLE 13.4 Characteristics of Relative Value ESP Portfolios

TABLE 13.5 Performance of High‐ over Low‐ESP Portfolios by Quality and Sector

TABLE 13.6 Performance of High‐ over Low‐ESP Portfolios by Trade Efficiency S...

TABLE 13.7 Performance of the Relative Value ESP Strategy with Turnover Contr...

TABLE 13.8 Performance of Index‐Tracking Portfolios Based on ESP

TABLE 13.9 Average Risk Premia of Credit Exposures, January 1993 to January 2...

TABLE 13.10 Correlations of Relative Value (ESP), Credit, and Equity Risk Fac...

Chapter 14

TABLE 14.1 Sample Creation

TABLE 14.2 Characteristics of Issuers in the Final Sample and the Respective ...

TABLE 14.3 Rating Notch Changes by Debt‐to‐Sustainable EBITDA Quintiles, Rati...

TABLE 14.4 Time‐Series Average and Standard Deviation of the Slope Estimates ...

TABLE 14.5 Average SPiDER, OAS, Debt/EBITDA Ratios at the End of Each Februar...

TABLE 14.6 Characteristics of Issuers in SPiDER Quintiles, Monthly Average, M...

TABLE 14.7 Performance Statistics of the SPiDER Strategy, March 1993 to Febru...

TABLE 14.8 Performances of SPiDER, Maximum Carry, and OAS‐Neutral SPiDER Stra...

TABLE 14.9 SPiDER Performance by Credit Ratings, March 1993 to February 2020

TABLE 14.10 Performance with Alternative SPiDER Definitions, March 1993 to Fe...

TABLE 14.11 Strategy Performance When SPiDER Is Based on Analyst EBITDA Conse...

TABLE 14.12 Effects of the Constituent Exit Rule on Portfolio Performance, Ma...

TABLE 14.13 Portfolio Performance Under Different Weighting Schemes, March 19...

TABLE 14.14 Performance with Quarterly Rebalancing, March 1993 to February 20...

TABLE 14.15 Performance with Biannual Rebalancing, March 1993 to February 202...

TABLE 14.16 Transition Matrix of SPiDER Quintile Rankings Between Year

t

and Y...

TABLE 14.17 Performances, Transaction Costs, and Tracking Errors of Top‐Quint...

TABLE 14.18 Characteristics of Bonds in the Benchmark, Tracking Universe, and...

TABLE 14.19 Performance Summary Statistics of the Index‐Tracking Portfolios w...

Chapter 15

TABLE 15.1 EMC Strategy Performance in Different Periods

TABLE 15.2 EMC Strategy Performance by Credit Quality, January 1993 to May 20...

TABLE 15.3 Average Three‐Month Equity Momentum Rank Transition Frequencies, D...

TABLE 15.4 Exposures of the EMC Strategy by Equity Market Regimes (S&P500), J...

TABLE 15.5 Correlation of EMC Returns with Equity and Fixed Income Market Fac...

TABLE 15.6 Returns of the EMC Strategy and Equity Factor Portfolios During Cr...

TABLE 15.7 Annualized Returns of the EMC Strategy in Credit Down‐Cycles and R...

TABLE 15.8 Annualized Returns of the EMC Strategy in Fed Cycles, January 1993...

TABLE 15.9 Performance of the EMC Strategy by Bond Trade Efficiency Scores (T...

TABLE 15.10 Performance of the EMC Strategy by Autocorrelation of Bond Excess...

TABLE 15.11 Performance of Relative Value (ESP) and Equity Momentum (EMC) Sty...

TABLE 15.12 Performance of the EMC Strategy by Signal Formation Period, Janua...

TABLE 15.13 Performance of the EMC Strategy with Lagged Stock Prices, January...

TABLE 15.14 Performance of the EMC Strategy Based on Issuer‐Specific Equity M...

TABLE 15.15 Performance of EMC Portfolios Controlling for Turnover and After ...

Chapter 16

TABLE 16.1 Performance of the EMC Strategy Within Individual Sectors, Novembe...

TABLE 16.2 Contribution from Sector Allocation to the Performance of the EMC ...

TABLE 16.3 Performance of Sector‐Based Equity Momentum Portfolios, November 2...

Chapter 17

TABLE 17.1 US Corporate Bonds: Measuring Issuer Size by Sector, 31 May 2018

TABLE 17.2 Average Transition Probabilities Across Issuer Size Deciles over 1...

TABLE 17.3 Average Transition Probabilities Across Issuer Size Deciles over 1...

TABLE 17.4 Performance of Size Portfolios

TABLE 17.5 Spread Exposure and Excess Return Volatility of Size Portfolios

TABLE 17.6 Comparing Characteristics and Allocations of Issuer Size Portfolio...

TABLE 17.7 Comparing Characteristics of Size Portfolios in Different Periods

TABLE 17.8 Estimating Size Spread Premium, 31 May 2018

TABLE 17.9 Characteristics of Exposure‐Matched Portfolios in US IG by Period

TABLE 17.10 Performance of Exposure‐Matched IG and HY Size Portfolios over Di...

TABLE 17.11 SML Returns Across Industry Sectors During Market Distress

TABLE 17.12 Size Premia in US Corporate IG, 31 May 2018

TABLE 17.13 Size Premia in US Corporate HY, 31 May 2018

TABLE 17.14 Performance of Exposure‐Matched Size Portfolios with Relaxed Spre...

Chapter 18

TABLE 18.1 Annualized Average Excess Returns of Top Scorecard Portfolios in C...

TABLE 18.2 ESP and EMC Scorecards: Combining Signals vs. Combining Portfolios

TABLE 18.3 LCS Market Coverage, 31 July 2019

TABLE 18.4 Performance of the Strategy Portfolio with Turnover Buffer

TABLE 18.5 Performance of Strategy Portfolio with 11% Turnover Budget

TABLE 18.6 Performance of Strategy Portfolios with Turnover Buffer and Turnov...

TABLE 18.7 Performance of Strategy Portfolios with 11% Turnover Buffer after ...

Chapter 19

TABLE 19.1 Basic Industry: Top 10 and Bottom 10 Issuers Based on OneScore, 28...

TABLE 19.2 Relative Performance of Top over Bottom OneScore Portfolios in Per...

TABLE 19.3 Monthly Excess Returns of Systematic Strategies During Credit Draw...

TABLE 19.4 Correlations of Strategy and Market Monthly (Excess) Returns, Janu...

Chapter 20

TABLE 20.1 Percentage of Bloomberg Barclays US Indices Included in the Sample

TABLE 20.2 Earnings Surprise Measures

TABLE 20.3 Summary Statistics of Earnings Surprise Measures

TABLE 20.4 Cumulative Abnormal Returns Following Earnings Announcements by Ra...

TABLE 20.5 Cumulative Abnormal Returns Following Earnings Announcements with ...

TABLE 20.6 Cumulative Abnormal Return Differences Between Top and Bottom EAR ...

TABLE 20.7 Cumulative Abnormal Return Differences Between Top and Bottom EAR ...

TABLE 20.8 Differences in Cumulative Abnormal Returns Between Top and Bottom ...

TABLE 20.9 Cross‐Sectional Univariate Regressions of Cumulative Abnormal Retu...

TABLE 20.10 Cross‐Sectional Multivariate Regressions of Cumulative Abnormal R...

TABLE 20.11 Characteristics of Bonds in the Index, Tracking Universe, and Tra...

TABLE 20.12 Performance Summary Statistics of Index‐Tracking Portfolios with ...

TABLE 20.13 Performance Summary Statistics of Tracking Portfolios with an ESP...

Chapter 21

TABLE 21.1 Selected Variables in FIS Astec Analytics Security Lending Files

TABLE 21.2 Illustrative Data

TABLE 21.3 Bond Mapping to Equity Short Interest

TABLE 21.4 Characteristics of Bonds in the Samples and Their Respective Index

TABLE 21.5 Rating Notch Changes by ESI Quintile Portfolios, Rating, and Horiz...

TABLE 21.6 Average Issuer Characteristics in ESI Quintile Portfolios

TABLE 21.7 Bond Characteristics in Index, Replication Universe, and Tilted Po...

TABLE 21.8 ESI: Performance of Replicating Portfolios and Long‐Short Strategi...

TABLE 21.9 Rating Notch Changes by BSI Quintile Portfolios, Rating, and Horiz...

TABLE 21.10 Issuer Characteristics and Performance of BSI Quintile Portfolios

TABLE 21.11 BSI: Performance Statistics of Replicating Portfolios and Long‐Sh...

TABLE 21.12 Performance Comparison of Replicating Portfolios and Long‐Short S...

TABLE 21.13 Statistics from ESI and BSI Double Sorts in the HY Universe

TABLE 21.14 Regression Coefficient Estimates

TABLE 21.15 Performance Statistics of Replicating Portfolios with an ESI Tilt...

TABLE 21.16 ESI + ESP: Performance Statistics of Replicating Portfolios and L...

TABLE 21.17 Performance Statistics of Replicating Portfolios with an ESI Tilt...

List of Illustrations

Chapter 1

FIGURE 1.1 Sharpe Ratios of Equities/Treasuries Benchmarks with Credit Alloc...

FIGURE 1.2 Illustration of Reallocation Effect

FIGURE 1.3 Sector Weight of Technology and Communications Sectors in Equity ...

FIGURE 1.4 Historical Weights of Equities/Treasuries in the Replication Port...

FIGURE 1.5 Performance of 60/40 Equities/Treasuries Portfolio with x% Credit...

FIGURE 1.6 Sharpe Ratio of Adding x% Credit Allocation to Different Mixes of...

FIGURE 1.7 Sharpe Ratio of Adding x% Credit Allocation to the 60/40 E/T Benc...

FIGURE 1.8 Characteristics of the Sample vs. Corresponding Indices

FIGURE 1.9 Illustration of Risk‐Matching Steps

FIGURE 1.10 Average Portfolio Weights

FIGURE 1.11

FIGURE 1.12 Sharpe (Information) Ratios of Bond vs. Replication Portfolios b...

FIGURE 1.13 Annualized Information Ratio of Bond‐over‐Replication Portfolios...

FIGURE 1.14 Percentage of Market Cap of S&P 500 Stocks Having Mapped Index B...

Chapter 2

FIGURE 2.1 Relative Spreads of Upgraded and Downgraded Issuers

FIGURE 2.2 Distribution of Relative Cumulative Performance since the Downgra...

FIGURE 2.3 Distribution of Minimum Relative Cumulative Return Month by Quart...

FIGURE 2.4 Median of Issuers’ Average Monthly Returns Conditional on Formati...

FIGURE 2.5 Relative Turnover and Liquidity of Downgraded Issuers

FIGURE 2.6 Median Cash‐CDS Basis Relative to Rating Event Month

FIGURE 2.7 Monthly Portfolio Bond Population

FIGURE 2.8 Distribution of Monthly Relative Returns for the 3‐Month Reversal...

FIGURE 2.9 Rolling 6‐Month Average Relative Returns of the 3‐Month Reversal ...

Chapter 3

FIGURE 3.1 Proportion Invested in Fallen Angels as a Function of Portfolio S...

FIGURE 3.2 LCS Values for Fallen Angel Strategies and the High Yield Index...

FIGURE 3.3 Dynamics of the Market‐Adjusted Cash–CDS Basis by Magnitude on Do...

FIGURE 3.4 Sample Distribution by Basis on Downgrade and Year

FIGURE 3.5 Cumulative Gross Returns from Trade Initiation

FIGURE 3.6 Cumulative Returns of Fallen Angels’ Bonds and Equities Around th...

Chapter 4

FIGURE 4.1 Relative Spreads of Fallen Angels around Inflection Months...

FIGURE 4.2 Monthly Change in Relative Turnover Around Inflection Months...

FIGURE 4.3 Rolling Estimation of Probability of Inflection by Change in Rela...

FIGURE 4.4 Time Series of Cumulative Returns (Returns over Peers) of Top‐ove...

FIGURE 4.5 Number of Fallen Angel Issuers in FAR Universe and Overweight Ass...

FIGURE 4.6 Cumulative Total Returns of FA‐Tilted Portfolio and the HY Index...

Chapter 5

FIGURE 5.1 Rolling Six‐Month Net Issuance as % of Amount Outstanding vs. Rol...

FIGURE 5.2 Credit Performance per Volume of Net Issuance, August 1994–July 2...

FIGURE 5.3 Correlations Between Issuance Rates and Subsequent Excess Returns...

FIGURE 5.4 Historical Market Weights of Selected Corporate Sectors in US Cor...

FIGURE 5.5 Contributions of Dynamic Weights to Index Returns by Sector, Febr...

FIGURE 5.6 Performance Statistics of Aggressive (Agg.) and Moderate (Mod.) I...

FIGURE 5.7 Performance Statistics of Aggressive and Moderate Issuers by Sect...

FIGURE 5.8 Cumulative Excess Returns of the Index with Equally Weighted Sect...

FIGURE 5.9 Liquidity Cost Score of Corporate Indices with Contrarian and Mar...

Chapter 6

FIGURE 6.1 Monthly Excess Return Difference: Bid‐to‐Bid vs. Offer‐to‐Bid Pri...

FIGURE 6.2 USD IG Corporate Index, Financial Sector, Cumulative Excess Retur...

FIGURE 6.3 USD IG Corporate 24‐Month Inclusion‐Delay Index Cumulative Excess...

FIGURE 6.4 USD IG Corporate Index Cumulative Excess Return Difference, Vario...

FIGURE 6.5 USD IG Corporate 24‐Month Inclusion‐Delay Index Cumulative Excess...

FIGURE 6.6 USD IG Corporate Index Cumulative Excess Return Difference, Vario...

FIGURE 6.7 Clean Zero‐Month Delay, 24‐Month Delay, and Young & Clean Zero‐Mo...

FIGURE 6.8 Cumulative Excess Return Difference, Clean Zero‐Month Delay Index...

FIGURE 6.9 USD IG Corporate Index Cumulative Excess Return Difference, Vario...

FIGURE 6.10 Average Monthly Excess Return Difference and Return Components, ...

Chapter 7

FIGURE 7.1 Monthly Median Concession: Syndicate vs. B/P Matched Subset

FIGURE 7.2 Median Concession by Year vs. Corporate Index Spread

FIGURE 7.3 Post‐Issuance Concession Dynamics

FIGURE 7.4 Effect of Bid/Ask Spread on Convergence of Concessions

FIGURE 7.5 Spread of Verizon Outstanding Bonds during the September 2013 Iss...

FIGURE 7.6 Dynamic of Issuers' Secondary Bond Spread by Size

FIGURE 7.7 Estimated “Outperformance” Due to Concessions

Chapter 8

FIGURE 8.1 Analyzing Downgrade Losses Year by Year

FIGURE 8.2 Loss Distribution for a Five‐Year, Baa‐Rated Bond, over a Five‐Ye...

FIGURE 8.3 Expected Cumulative Excess Returns for Five‐Year, A‐ and Baa‐Rate...

FIGURE 8.4 Risk/Return Trade‐off for A‐Rated and Baa‐Rated Debt on a Five‐Ye...

FIGURE 8.5 Effect of Bond Maturity on Five‐Year Cumulative Expected Excess R...

FIGURE 8.6 Effect of Bond Maturity on Five‐Year Cumulative Expected Excess R...

FIGURE 8.7 Moody's Cumulative Default Rates vs. Beginning‐of‐Year Spreads by...

FIGURE 8.8 Moody's Cumulative Default Rates vs. Beginning‐of‐Year Spreads by...

FIGURE 8.9 Dependence of One‐Year Downgrade Frequency on Beginning‐of‐Year S...

FIGURE 8.10 Dependence of One‐Year Downgrade Frequency on Beginning‐of‐Year ...

FIGURE 8.11 Correlation of Downgrade Frequencies with Spreads, by Credit Qua...

FIGURE 8.12 Correlation of Current Spreads with Future Spreads, by Credit Qu...

FIGURE 8.13 Baa–A Spread Difference vs. Spread Level of A‐Rated Bonds

FIGURE 8.14 Ba–Baa Spread Difference vs. Spread Level of Baa‐Rated Bonds

FIGURE 8.15 Perturbed Transition Matrix Example: High Spread Environment

FIGURE 8.16 Example: Applying Different Transition Matrices in Different Yea...

FIGURE 8.17 Modeled Risk/Return Trade‐off by Quality and Sell Discipline, fo...

FIGURE 8.18 Modeled Risk/Return Trade‐off by Quality and Sell Discipline, fo...

Chapter 9

FIGURE 9.1 Rating Allocation of Buy and Hold (BH) Portfolios over Time

FIGURE 9.2 Downgrade Frequency of Aaa–Aa Bonds and Spread Gap Between Bonds ...

Chapter 10

FIGURE 10.1 Spreads of Verizon Bonds as a Function of Coupon, April 28, 2014...

FIGURE 10.2 Time Series of Regression Results for Dependence of Spread on Co...

FIGURE 10.3 Credit Spread Premium, Represented by Baa–Aaa Yield Difference, ...

Chapter 11

FIGURE 11.1 Information Ratio of Maturity Buckets, 1994 to 2019

FIGURE 11.2 Average Excess Return of Maturity Buckets, 1994 to 2019 (bp/y)...

FIGURE 11.3 Average OAS and Average Excess Returns of Subsets of the US IG C...

FIGURE 11.4 Liquidity Cost Score per Unit of DTS for Maturity Subsets of the...

FIGURE 11.5 Average OAS (bp) of IG Maturity Buckets at Beginning and End of ...

FIGURE 11.6 Net Monthly Change in Rating Quality (in Unit of Fine Rating Not...

FIGURE 11.7 Attribution of Excess Returns for the 3–5‐Year US IG Corporate I...

FIGURE 11.8 Attribution of Excess Returns for the 9–11‐Year US IG Corporate ...

Chapter 12

FIGURE 12.1 Correlations Between ESG Scores of MSCI and Sustainalytics

FIGURE 12.2 Average Correlation Between Credit Rating and ESG Score, 2009 to...

FIGURE 12.3 Cumulative Outperformance (%) of a High‐ESG over a Low‐ESG Portf...

FIGURE 12.4 Cumulative Outperformance (%) of a High‐ESG over a Low‐ESG Portf...

FIGURE 12.5 Historical ESG Spread Premium in the US IG Market (MSCI)

FIGURE 12.6 Historical ESG Spread Premium in the US IG Market (Sustainalytic...

FIGURE 12.7 Historical ESG Spread Premium in the Euro IG Market (MSCI)

FIGURE 12.8 Historical ESG Spread Premium in the Euro IG Market (Sustainalyt...

FIGURE 12.9 Rolling Average Number of Downgrade Notches per Issuer and per Y...

FIGURE 12.10 ESG Coverage of the US HY Market

FIGURE 12.11 ESG Spread Premium in the US HY Market (MSCI) (bp)

FIGURE 12.12 ESG Spread Premium in the US HY Market (Sustainalytics) (bp)...

FIGURE 12.13 Cumulative Performance (%) of a High‐ESG over a Low‐ESG Portfol...

FIGURE 12.14 Cumulative Performance (%) of a High‐ESG over a Low‐ESG Portfol...

Chapter 13

FIGURE 13.1 Average Spread vs. Average Excess Return: US Corporate Investmen...

FIGURE 13.2 Average Spread vs. Volatility of Excess Returns: US Corporate In...

FIGURE 13.3 Excess Spread vs. Excess Leverage over Peers for Consumer Noncyc...

FIGURE 13.4 Performance of Bond Portfolios by ESP Deciles, 1993 to 2016

FIGURE 13.5 Cumulative Excess Returns of Relative Value ESP Portfolios

FIGURE 13.6 ESP Spread Between High‐ and Low‐ESP Portfolios and Subsequent 1...

FIGURE 13.7 ESP Strategy Average 12‐Month Excess Return per Quintile of High...

FIGURE 13.8 Monthly Trading Volume by ESP Deciles, 2007 to 2016

FIGURE 13.9 Rolling 12‐Month Turnover of High‐ESP Portfolios

FIGURE 13.10 Security‐Specific Volatility by ESP Deciles

FIGURE 13.11 Security‐Specific Volatility and Information Ratio as a Functio...

Chapter 14

FIGURE 14.1 Slope Estimates from Yearly Cross‐Sectional Regressions, Februar...

FIGURE 14.2 Time‐Series Average OAS and D/E Ratios Across All Issuers, 1993 ...

FIGURE 14.3 Cumulative Excess Returns of the SPiDER Strategy, March 1993 to ...

FIGURE 14.4 Average Excess Returns, Volatilities, and Information Ratios by ...

FIGURE 14.5 Realized Volatility vs. DTS‐Implied Volatility by Quintiles, Mar...

FIGURE 14.6 Information Ratios by Quintiles with DTS Matched Equally Across ...

FIGURE 14.7 Performance of SPiDER Strategy (Q5–Q1) by Industry, March 1993 t...

FIGURE 14.8 Strategy Post‐Formation Median and Average Performances (L‐S) by...

FIGURE 14.9 Annual Portfolio Turnover of the Long‐Only Portfolio (Q5) with A...

Chapter 15

FIGURE 15.1 Cumulative Excess Returns of Corporate Bond Portfolios Based on ...

FIGURE 15.2 Results of the Survey Among US Institutional Bond Managers, QPS ...

FIGURE 15.3 Average Excess Returns and Volatilities of Corporate Bonds by Eq...

FIGURE 15.4 Turnover and Returns of EMC Portfolios as a Function of Time Sin...

FIGURE 15.5 Return Probability Distributions of 100‐Bond EMC Portfolios with...

FIGURE 15.6 Historical Net OAS of the EMC Strategy (Q5–Q1), December 1992 to...

FIGURE 15.7 US Credit Drawdown Episodes, December 1992 to May 2017

FIGURE 15.8 Federal Reserve Easing and Tightening Episodes

FIGURE 15.9 Annualized Returns of the EMC Strategy in FED Cycles, January 19...

FIGURE 15.10 Average Excess Returns of US Corporate IG Portfolios by ESP Sco...

FIGURE 15.11 Combining Relative Value (ESP) and Equity Momentum (EMC) Signal...

FIGURE 15.12 Reducing Turnover Using a Hold Buffer Between “Buy” and “Sell” ...

Chapter 16

FIGURE 16.1 Average Excess Returns and Volatilities of Corporate Bonds Group...

FIGURE 16.2 Equity Momentum of Class 3 Sectors as of 31 October 2017

FIGURE 16.3 Average Excess Returns of Corporate Sectors Sorted by Equity Mom...

FIGURE 16.4 Cumulative Excess Returns over Index of Top Five Sector Portfoli...

FIGURE 16.5 Annual Excess Returns over Index of Top Five Sector Portfolios B...

Chapter 17

FIGURE 17.1 Distribution of Issuer Count and Market Value by Size in the Blo...

FIGURE 17.2 Evolution of Average Issuer Size in the US Corporate IG and HY I...

FIGURE 17.3 Average Issuer Size of Sorted Portfolios (log‐scale)

FIGURE 17.4 Average Liquidity Cost Scores of Size Portfolios, January 2007 t...

FIGURE 17.5 Autocorrelations in Excess Returns of Size Portfolios, January 1...

FIGURE 17.6 Size Portfolios’ Excess Returns Volatilities Measured over Diffe...

FIGURE 17.7 Attributing Spread Difference Between Small‐ and Large‐Size Issu...

FIGURE 17.8 Average Size Spread Premium by Issuer‐Size Deciles, January 2018...

FIGURE 17.9 Historical Characteristics of Exposure‐Matched Portfolios in US ...

FIGURE 17.10 Cumulative SML Returns Obtained as Return Differentials Between...

FIGURE 17.11 Cumulative SML Returns Obtained from Exposure‐Matched Portfolio...

Chapter 18

FIGURE 18.1 Excess Spread to Peers Scorecard Implementation

FIGURE 18.2 Equity Momentum in Credit Scorecard Implementation

FIGURE 18.3 Average Excess Returns of Corporate Bond Portfolios Sorted on ES...

FIGURE 18.4 Monthly Cross‐Sectional Rank Correlations Between ESP and EMC Sc...

FIGURE 18.5 Drawdown Episodes in Cumulative Excess Returns of the US Corpora...

FIGURE 18.6 LCS of Corporate Bonds over Time and in the Cross‐Section

FIGURE 18.7 Volume and LCS Distributions of US IG Corporate Bonds, December ...

FIGURE 18.8 Strategy Rules Designed Using Individual or Combined ESP and EMC...

FIGURE 18.9 Average Turnover (in %/month) of the Strategy Portfolio with Tur...

FIGURE 18.10 Distribution of Time (in Months) a Bond Spends in the Strategy ...

FIGURE 18.11 Evolution of Liquidity Characteristics of Bonds in the Strategy...

FIGURE 18.12 Cumulative Excess Returns of the Strategy Portfolio and of the ...

FIGURE 18.13 Average DTS Exposures of Strategy Portfolio and the US Corporat...

FIGURE 18.14 Building a Strategy Portfolio with an Explicit Turnover Budget ...

FIGURE 18.15 Average Returns of Strategy Portfolios over the US Corp. IG Ind...

FIGURE 18.16 Average Excess Returns of Strategy Portfolios over the US Corp....

FIGURE 18.17 Cumulative Excess Returns of the Strategy Portfolio with 11% Tu...

FIGURE 18.18 Distribution of Time (in Months) a Bond Spends in the Strategy ...

FIGURE 18.19 Average Excess Returns of EMC‐Based Portfolios over the US Corp...

FIGURE 18.20 Average Excess Returns of ESP‐Based Strategy Portfolios over th...

Chapter 19

FIGURE 19.1 Cumulative Excess Returns of OneScore Top and Bottom Investment‐...

Chapter 20

FIGURE 20.1 Sector Market Value Distribution in Sample vs. in the Correspond...

FIGURE 20.2 Characteristics of the Sample vs. the Corresponding Index

FIGURE 20.3 Percentage of Earnings Announcements by Month and Day of the Wee...

FIGURE 20.4 Daily Average Abnormal Returns of Top and Bottom EAR Quintiles F...

FIGURE 20.5 Corporate Abnormal Return Differences Between Top and Bottom EAR...

FIGURE 20.6 Cumulative Performance of the Tracking Portfolio (Max‐EAR) over ...

Chapter 21

FIGURE 21.1 Estimates of Average ESI for US IG and HY Issuers

FIGURE 21.2 Value‐weighted ESI and Lending Fees across Sectors

FIGURE 21.3 Average Excess Returns, Volatilities, and Information Ratios in ...

FIGURE 21.4 ESI: Cumulative Strategy Returns

FIGURE 21.5 BSI: Cumulative Strategy Returns

FIGURE 21.6 Average Number of Companies per ESI and ESP Quintile Combination...

FIGURE 21.7 ESI + ESP: Cumulative Strategy Returns

FIGURE 21.8 Average Number of Companies per ESI and EMC Quintile Combination...

Guide

Cover Page

Table of Contents

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The Frank J. Fabozzi Series

Fixed Income Securities, Second Edition by Frank J. Fabozzi

Focus on Value: A Corporate and Investor Guide to Wealth Creation by James L. Grant and James A. Abate

Handbook of Global Fixed Income Calculations by Dragomir Krgin

Managing a Corporate Bond Portfolio by Leland E. Crabbe and Frank J. Fabozzi

Real Options and Option‐Embedded Securities by William T. Moore

Capital Budgeting: Theory and Practice by Pamela P. Peterson and Frank J. Fabozzi

The Exchange‐Traded Funds Manual by Gary L. Gastineau

Professional Perspectives on Fixed Income Portfolio Management, Volume 3 edited by Frank J. Fabozzi

Investing in Emerging Fixed Income Markets edited by Frank J. Fabozzi and Efstathia Pilarinu

Handbook of Alternative Assets by Mark J. P. Anson

The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, and Moorad Choudhry

The Handbook of Financial Instruments edited by Frank J. Fabozzi

Collateralized Debt Obligations: Structures and Analysis by Laurie S. Goodman and Frank J. Fabozzi

Interest Rate, Term Structure, and Valuation Modeling edited by Frank J. Fabozzi

Investment Performance Measurement by Bruce J. Feibel

The Handbook of Equity Style Management edited by T. Daniel Coggin and Frank J. Fabozzi

Foundations of Economic Value Added, Second Edition by James L. Grant

Financial Management and Analysis, Second Edition by Frank J. Fabozzi and Pamela P. Peterson

Measuring and Controlling Interest Rate and Credit Risk, Second Edition by Frank J. Fabozzi, Steven V. Mann, and Moorad Choudhry

Professional Perspectives on Fixed Income Portfolio Management, Volume 4 edited by Frank J. Fabozzi

The Handbook of European Fixed Income Securities edited by Frank J. Fabozzi and Moorad Choudhry

The Handbook of European Structured Financial Products edited by Frank J. Fabozzi and Moorad Choudhry

The Mathematics of Financial Modeling and Investment Management by Sergio M. Focardi and Frank J. Fabozzi

Short Selling: Strategies, Risks, and Rewards edited by Frank J. Fabozzi

The Real Estate Investment Handbook by G. Timothy Haight and Daniel Singer

Market Neutral Strategies edited by Bruce I. Jacobs and Kenneth N. Levy

Securities Finance: Securities Lending and Repurchase Agreements edited by Frank J. Fabozzi and Steven V. Mann

Fat‐Tailed and Skewed Asset Return Distributions by Svetlozar T. Rachev, Christian Menn, and Frank J. Fabozzi

Financial Modeling of the Equity Market: From CAPM to Cointegration by Frank J. Fabozzi, Sergio M. Focardi, and Petter N. Kolm

Advanced Bond Portfolio Management: Best Practices in Modeling and Strategies edited by Frank J. Fabozzi, LionelMartellini, and Philippe Priaulet

Analysis of Financial Statements, Second Edition by Pamela P. Peterson and Frank J. Fabozzi

Collateralized Debt Obligations: Structures and Analysis, Second Edition by Douglas J. Lucas, Laurie S. Goodman, and Frank J. Fabozzi

Handbook of Alternative Assets, Second Edition by Mark J. P. Anson

Introduction to Structured Finance by Frank J. Fabozzi, Henry A. Davis, and Moorad Choudhry

Financial Econometrics by Svetlozar T. Rachev, Stefan Mittnik, Frank J. Fabozzi, Sergio M. Focardi, and Teo Jasic

Developments in Collateralized Debt Obligations: New Products and Insights by Douglas J. Lucas, Laurie S. Goodman, Frank J. Fabozzi, and Rebecca J. Manning

Robust Portfolio Optimization and Management by Frank J. Fabozzi, Petter N. Kolm, Dessislava A. Pachamanova, and Sergio M. Focardi

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimizations by Svetlozar T. Rachev, Stogan V. Stoyanov, and Frank J. Fabozzi

How to Select Investment Managers and Evaluate Performance by G. Timothy Haight, Stephen O. Morrell, and Glenn E. Ross

Bayesian Methods in Finance by Svetlozar T. Rachev, John S. J. Hsu, Biliana S. Bagasheva, and Frank J. Fabozzi

Structured Products and Related Credit Derivatives by Brian P. Lancaster, Glenn M. Schultz, and Frank J. Fabozzi

Quantitative Equity Investing: Techniques and Strategies by Frank J. Fabozzi, Sergio M. Focardi, and Petter N. Kolm

Introduction to Fixed Income Analytics, Second Edition by Frank J. Fabozzi and Steven V. Mann

The Handbook of Traditional and Alternative Investment Vehicles by Mark J. P. Anson, Frank J. Fabozzi, and Frank J. Jones

The Theory and Practice of Investment Management, Second Edition edited by Frank J. Fabozzi and Harry M. Markowitz

Systematic Investing in Credit

ARIK BEN DOR

ALBERT DESCLÉE

LEV DYNKIN

JAY HYMAN

SIMON POLBENNIKOV

Copyright © 2021 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per‐copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750‐8400, fax (978) 646‐8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748‐6011, fax (201) 748‐6008, or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging‐in‐Publication Data is Available:

Hardback: 9781119751281

Adobe PDF: 9781119751304

epub: 9781119751298

Cover Design: Wiley

Cover Image: © Grafissimo/Getty Images

“To my wife Alina for her unwavering support and to my children Rachel, Joseph, Aryeh and David who inspire all my work.”

—LD

“To my parents Lya and Ron to whom I can never repay for the sacrifices they made, my wife Melina who makes me a better human being each and every day and my pride and joy, my beloved children Shiraz, Shelly and Tamir”

—ABD

“To my wife, Anne‐Louise, for her patience and support”

—AD

“To Ella”

—JH

“To my family and friends”

—SP

Acknowledgments

The authors would like to thank their colleagues at Barclays Research – Vadim Konstantinovsky, Jingling Guan, Mathieu Dubois, Xiaming Zeng and Stephan Florig for their contributions to the book and help in reviewing and editing the manuscript.

The authors would also like to acknowledge former colleagues Carlo Rosa, Bruce Phelps, Anando Maitra, Jason Xu and Kwok Yuen Ng for their past contributions to the group’s research.

The authors are very grateful to Jeff Meli – Head of Barclays Research – for his support of the group’s work.

The authors would like to recognize Laurent Caraffa, Richard Cunningham, Steve Lessing, Paul Degen and Ellis Thomas for their consistent support of our work and for including us in their dialog with institutional investors who motivated many of the studies contained in this book.

Finally, the authors would like to thank their families for bearing over the years the sacrifices of family time necessary to produce the research in this book and prepare it for publication.

Foreword

I first met Lev Dynkin and other members of the Barclays Quantitative Portfolio Strategy (QPS) Group at one of their esteemed annual investment councils. The experience brought back fond memories of the intimate conferences from my prior academic life in physics. The focus of the QPS council was not to sell or promote but rather to expand the knowledge of attendees and seek understanding of complex market phenomena. Evident throughout the day was the team's sincere desire to help investors achieve better outcomes.

For over 25 years, the QPS team has been at the forefront of research into methods to guide investors in making better decisions in their fixed income portfolios. This book is another milestone for this respected team. Here they compile their past and present research for the benefit of a broader investment community. The focus is not simply on innovation for its own sake. Rather it is to share and educate readers, thereby advancing the field and adding to the core knowledge of all market participants.

Why does this collection of insights deserve your attention? Because systematic approaches—and, more broadly, scientific approaches—are the future of credit investing. Scientific problem solving is the primary means of tackling data‐rich complexity in virtually any field, investment related or not. In the field of investing, such approaches utilize the best of the human mind's natural ability to design processes and methodologies while avoiding the cognitive and behavioral biases inherent within traditional discretionary asset management.

Scientific approaches in fixed income credit are the exception rather than the rule and have lagged those in equity markets. This is because the successful implementation of a scientific investment approach generally requires four primary inputs: rich and relevant data availability, high breadth of investable instruments, sophisticated markets enabling long and short positioning, and a growing body of research, built on a foundation of prior knowledge, from which to find new and workable insights.

Credit markets in recent years have seen these four conditions met for the first time. This was not the case 20 years ago when today's homogeneous European credit market was born, nor when the first credit default swap was traded in the 1990s. Scientific credit investing stands today where scientific equity investing stood at the turn of the century: in an uncrowded space and on the threshold of considerable secular growth. This suggests significant and durable alpha generation possibilities for those investors capable of grasping the opportunity at hand.

It's not easy, however: Credit is complex, heterogeneous, and illiquid relative to equities. Scientific credit investing requires not only predictive insights but also the analysis and incorporation of bespoke liquidity, risk, and transaction cost considerations. Growing issuer breadth further demands high data capture. If success is achieved, the prize is enormous: the intellectual property of a scientific approach sits at an organizational level rather than in the minds of star traders. This lasting form of knowledge management can be built upon to create further iterative improvement—a powerful incentive.

Necessarily, this book covers only a small, yet important, part of the annals of current research in the field. A book could be written on each component of the investment process: selection of the traded universe, data management and application, creation and utilization of predictive insights, and the crucial step of portfolio construction—where insights must optimally and realistically meet risk management, trading costs, and liquidity considerations specific to credit. Each part of the process stands to benefit from a rigorous approach.

A collaborative spirit runs through the scientific investment community that is generally in contrast to the siloed mindset of traditional active management. This positive knowledge sharing is evident across a number of scientific firms and their practitioners, who publish insights and share best practices with investors. It is in this spirit that the QPS team has compiled the contents herein. I know nothing will make the QPS team happier than if readers benefit from, and build upon, QPS's research in the context of their own portfolios.

May this book inform and guide you on your own scientific journey, even as the QPS team tackles new frontiers of research.

Alex KheinChief ExecutiveBlueCove Limited

Preface

For over two decades, Barclays Research's Quantitative Portfolio Strategy (QPS) group has been recognized as a leading source of innovative insights into the fixed income markets. In the 1990s, the team was involved in the development of what was then known as the Lehman Brothers Global Family of Indices, providing an essential foundation for quantitative analysis of fixed income markets: high‐quality data, available systematically. Today, the Bloomberg Barclays fixed income indices remain an integral part of the active and passive global portfolio management processes.

In its early years, the QPS team made use of fixed income data to create some of the first risk and return analytics for corporate bond portfolios, coded in C for Windows 1.0 and shipped to clients by mail every month on floppy disks. Client requests for data analysis beyond the scope of the software platform led to bespoke research projects and, ultimately, to the shift in the QPS team's focus toward a broad range of quantitative topics in portfolio management. Over the years, the group cemented its reputation among fixed income professionals, collecting many accolades along the way, including being repeatedly top ranked in Institutional Investor surveys in the United States and Europe.1

The QPS team has always paired a relentless focus on relevant, implementable findings in response to questions from practitioners with a sophisticated and rigorous approach. Many of the ideas behind the team's research projects come from interactions with a broad range of investors, through one‐on‐one meetings as well as various seminars and councils organized by Barclays. This has enabled the team to expand its research beyond its traditional fixed income focus. One important example is the group's development of cross‐asset signals, where information from credit is applied to equities, and vice versa. While simple in concept, mapping bonds to equities requires a deep understanding of corporate bonds, which the team has developed over decades. Several of the approaches detailed in this book draw on these cross‐asset insights.

The QPS group also remains closely connected with Barclays Research's fundamental analysts. This connectivity has helped the team incorporate fundamental data alongside prices and risk metrics in its products; several of these are discussed in detail in this volume. Going forward, the team remains committed to evolving its approach. Recently it has begun to partner with Barclays Research's data science team, with a view to incorporating modern data techniques and new, and at times larger, datasets into its analysis.

It is rare to find a group that has had such consistent success with its core mission over the years, yet remains so committed to innovation and creativity. Collaborating with the QPS team has been a great privilege.

—Jeff Meli, Head of Barclays Research

NOTE

1

. The team ranked #1 in the Quantitative Analysis category in the

Institutional Investor

All‐America Fixed Income Research Team Survey (2006–2008) and in 2017 and #2 in 2018. From 2009 to2016, this category was not included. The team ranked #1 in the Quantitative Analysis category in the All‐Europe

Institutional Investor

Fixed Income Research Survey (2013–2015 and 2018).

Introduction