The strategy involves US dollar-denominated corporate bonds, ranked by excess returns and adjusted volatility. The top decile (D1) is long, bottom decile (D10) is short, with monthly rebalancing.
ASSET CLASS: bonds | REGION: United States | FREQUENCY:
Monthly | MARKET: bonds| KEYWORD: Volatility-Adjusted, Momentum, Corporate Bonds
I. STRATEGY IN A NUTSHELL
This strategy trades US dollar-denominated corporate bonds with at least one year to maturity and a minimum notional value of $150 million. Each month, bonds’ past six-month excess returns are volatility-adjusted (target 1.7%), ranked into deciles, and the top decile is bought while the bottom decile is shorted. Portfolios are held for six months and rebalanced monthly, with the 1st and 99th percentile bonds excluded to avoid skewed exposure. Positions are equally weighted.
II. ECONOMIC RATIONALE
Momentum in corporate bonds is driven largely by behavioral factors. Investors tend to underreact to earnings news and information diffuses slowly, causing prices to adjust gradually. This explains persistent positive returns initially, a moderate decline in the second year, and a rebound
III. SOURCE PAPER
Volatility-Adjusted Momentum [Click to Open PDF]
Jeroen van Zundert , Cubist Systematic Strategies.
<Abstract>
Motivated by standard portfolio theory, this paper incorporates ex-ante volatility estimates in the construction of winner-minus-loser stock momentum portfolio. I find that over the 1927-2015 period this leads to an increase in the Sharpe ratio from 0.34 to 1.14 and strongly reduced crash risk. This result is driven, in part, by the under weighting of high-volatility loser stocks, which tend to perform well, and cannot be attributed to small caps. In an out-of-sample test on USD-denominated corporate bonds, similar improvements are found
IV. BACKTEST PERFORMANCE
| Annualised Return | 3.18% |
| Volatility | 3.06% |
| Beta | N/A |
| Sharpe Ratio | 1.04 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
