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Financial Markets and Portfolio Management
Published in: Financial Markets and Portfolio Management 3/2023

04-08-2023

Factors in Swiss franc corporate bond returns

Author: Samuel Manser

Published in: Financial Markets and Portfolio Management | Issue 3/2023

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Abstract

This paper examines the cross-sectional drivers of credit returns for Swiss franc corporate bonds in a comprehensive sample including trade-based prices and effective bid-ask spreads from 2007 to 2022. Characteristics for momentum, carry, value, and defensive explain a significant part of the variation in future credit returns across companies. Value is based on a market-based credit risk model. Except for carry, the characteristics also deliver positive risk-adjusted returns. These results are robust for trade-based prices and different subsamples but transaction costs significantly reduce the profitability of the characteristics. After transaction costs, value and a combination of the characteristics remain profitable and continue to deliver significant risk-adjusted returns.
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Appendix
Available only for authorised users
Footnotes
1
For USD high-yield bonds (Lin, Wang, and Wu 2013; Haesen, Houweling, and van Zundert 2017), for EUR investment grade bonds (Bektić, 2018), for EUR high yield bonds (Kaufmann and Messov 2020), and for GBP, CAD, AUD, and JPY bonds (Spielmann and Wenzler 2019).
 
2
In unreported results, I use the residual from a cross-sectional regression of market credit spreads on Bharath and Shumway’s (2008) default probability for value as described in Israel et al. (2018). However, using Bloomberg’s model spreads leads to a value characteristic that delivers higher risk-adjusted returns.
 
3
The ICE BofA Global Corporate Index dates back to December 1996 and is used extensively in the literature, among others by Israel et al. (2018). CHF bonds have only been included since October 2020.
 
4
The SIX offers a SBI Corporate Index whose constituents are part of the SBI Total AAA-BBB Index. However, the SBI Corporate Index is available only from January 2011. The selection criteria applied here match that of the SBI Corporate Index plus require that the issuer has a publicly traded equity. Per October 2022, this covers about 80% of the market capitalization of the SBI Corporate Index.
 
5
During October 2008, there were four extraordinary cancellations in the beginning of the month that are considered with exit prices at the previous month end.
 
6
The Swiss National bank uses an extension of the Nelson and Siegel (1987) model by Svensson (1994) that describes the yield curves using a parametric function (Müller 2002) and provides daily parameter estimates.
 
7
Individual off-order book trades are reported in SIX’s delayed publication bonds report 1 day after trade date.
 
8
For all bond observations used in this study, the average volume on either side of the first level of the order book is about CHF 160,000.
 
9
To derive DRSK’s model CDS spread, Goldberg, Hu and Stein (2021) regress the market CDS spreads against default probabilities and indicators of sector and region. To account for the relationship between default probabilities and market CDS spreads changing over time, regressions are run on a weekly basis. DRSK’s model CDS spread is the fitted spread of that regression.
 
10
Rating BBB is subsumed in the constant term for the regressions with the control variables. Moreover, there are only few observations for rating AAA in the beginning of the sample.
 
11
The ordinary least squares (OLS) estimates from a \(N\times 1\) vector of returns \(r\) on a \(N\times K\) matrix \(X\) that includes a constant and \(K-1\) standardized regressors equals \({\left({X}^{^{\prime}}X\right)}^{-1}{X}^{^{\prime}}r\). This can also be written as \({w}^{^{\prime}}r\), where \(w\) is a \(N\times K\) matrix of portfolio weights. The \(K=1\) column of \(w\) are the constant benchmark weights \(1/N\). The \(K>1\) columns represent zero sum portfolio weights with a unit exposure to the corresponding regressor and zero exposure to all other regressors, as \({w}^{^{\prime}}X={\left({X}^{^{\prime}}X\right)}^{-1}{X}^{^{\prime}}X\) is the \(K\times K\) identity matrix.
 
12
The mean returns of Table 5, panel A can differ slightly to the coefficients of the univariate regressions in Table 4, panel A. One reason is that the coefficients in Table 4 represent mean returns of portfolios that do not rebalance if a company drops out during the 12 month holding period. The factor portfolio weights underlying Table 5 are rebalanced every month to sum to zero.
 
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Metadata
Title
Factors in Swiss franc corporate bond returns
Author
Samuel Manser
Publication date
04-08-2023
Publisher
Springer US
Published in
Financial Markets and Portfolio Management / Issue 3/2023
Print ISSN: 1934-4554
Electronic ISSN: 2373-8529
DOI
https://doi.org/10.1007/s11408-023-00432-3

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