PT - JOURNAL ARTICLE AU - Johnny Kang AU - Tom Parker AU - Scott Radell AU - Ralph Smith TI - Reach for Safety AID - 10.3905/jfi.2018.27.4.006 DP - 2018 Mar 31 TA - The Journal of Fixed Income PG - 6--21 VI - 27 IP - 4 4099 - https://pm-research.com/content/27/4/6.short 4100 - https://pm-research.com/content/27/4/6.full AB - In the corporate bond market, investor propensity to reach for yield creates an opportunity for factor-based investors to “reach for safety” following an economic intuition that parallels low-risk factor investing in equities. Given this insight, the authors develop a measure of credit safety based on the Merton [1974] distance-to-default variable, which they use to define quality and value factors. They demonstrate that both factors help explain the cross-section of corporate bond returns in an uncorrelated and complementary manner. Since these factors have performed particularly well in their bottom quintiles, the authors demonstrate how they can be used as screens within long-only portfolios. In addition, they show how incorporating their quality and value insights in a long-only optimization setup can generate significant outperformance net of estimated transaction costs versus traditional value-weighted market portfolios.TOPICS: Fixed income and structured finance, analysis of individual factors/risk premia, portfolio construction