Strategies · Library · Fixed income
§5.10Factor
Value factor
Estimate a fair credit spread for each bond from its rating and maturity, then buy bonds whose actual spread is widest above that fair value, assuming they are cheap.
- Asset class
- Fixed income
- Held for
- Months
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Gap between observed and regression-fitted credit spread
- Entry and exit
- Buy the top tenth by gap; rebalance monthly.
- Sizing
- Equal across selected bonds
How it fails
- Rating mapping noise
- Spread can signal real distress
- Needs bond data
Data it needs
- inputs ARCANE does not hold
No bond-level spreads or ratings in ARCANE.
How ARCANE uses it
None yet: ARCANE does not hold the data this trades on.
Needs bond spreads and a cross-sectional regression.
Filed under the factor card
Own companies that are small, cheap, profitable and invest conservatively, against their opposites, and rebalance once a year.
A paper plan from this card holds 63 to 365 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §5.10, p. 74 of the SSRN version. Described in our words. Factor is ARCANE’s filing, not the book’s.