RT Journal Article SR Electronic T1 Reach for Safety JF The Journal of Fixed Income FD Institutional Investor Journals SP 6 OP 21 DO 10.3905/jfi.2018.27.4.006 VO 27 IS 4 A1 Johnny Kang A1 Tom Parker A1 Scott Radell A1 Ralph Smith YR 2018 UL https://pm-research.com/content/27/4/6.abstract 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