Extending Fama-French Factors to Corporate Bond Markets

The explanatory power of size, value, profitability and investment has been extensively studied for equity markets. Yet, the relevance of these factors in global credit markets is much less explored although equities and bonds should be related according to structural credit risk models. We investigate the impact of the four Fama-French factors in the U.S. and European corporate bond space. While all factors are economically and statistically significant in the U.S. high yield market, we find mixed evidence for U.S. and European investment grade markets. Nevertheless, we show that equally-weighted investable multi-factor long-only portfolios outperform the corresponding U.S. and European corporate bond benchmarks on a risk-adjusted basis.