ENCORE - Engaging New Controversial Original Rigorous Entertaining
Building Equity Momentum Strategies Using Information From Credit Markets
Seminar by Arik Ben Dor
11th May 2021
In this seminar Dr. Arik Ben Dor will discuss a replicable, successful, enhanced equity momentum strategy built using insights extracted from corporate bond prices.
If corporate bond prices contain information that is not already fully reflected in equity prices then equity portfolio managers should pay attention to the price behaviour of bonds issued by companies in which they consider buying (or selling) shares.
There has been surprisingly little work investigating firm-level price dynamics and information flow across markets. The lack of research on the use of bond data in the construction of equity portfolios is due to both the lack of a comprehensive and easily accessible bond pricing dataset, and the belief by many market participants that bond pricing lags its equity counterpart because of the illiquidity of the U.S. corporate bond market. The assumption has been that any information reflected in bond prices is already incorporated in equity valuations. What if that assumption is wrong?
Arik Ben Dor, the Head of Quant Equity Research at Barclays will discuss some of the research he and his colleagues conducted since 2014 relating to momentum strategies. Equity momentum offers a natural way to test if corporate bond prices contain information that is not reflected in the equity market since it relies solely on publicly available historic equity pricing data. Further, because of its simple and well defined formulation, the strategy can be easily replicated, and the results compared with the existing literature.
Dr. Ben Dor will discuss the unique dataset used in the study and compare the performance dynamics of the standard momentum portfolio to a second momentum portfolio called BEAM (Bonds in Equity Asset Momentum). The BEAM portfolio is constructed by ranking the same set of firms based on the aggregate returns of their bonds, and populating the ‘long’ and ‘short’ legs of the portfolio by the corresponding stocks. So, both equity momentum portfolios are built from the same initial universe of firms but use different information to rank holdings in the final portfolios.
Since 1994, the BEAM momentum portfolio has generated an information ratio three to four times that of the standard momentum portfolio with both higher average return and lower monthly volatility. In particular, BEAM outperformed the standard momentum portfolio in periods of market reversal when the market rebounded quickly from a severe trough. The outperformance of the BEAM portfolio has persisted after controlling for differences in the portfolios’ construction methodology, sectors, exposure to systematic risk factors and constituents’ characteristics.
Arik Ben Dor, PhD
Head of Quantitative Equity Research at Barclays
Arik Ben Dor, PhD is the Head of Quantitative Equity Research at Barclays and a member of QPS since 2004. Dr. Ben Dor oversaw large scale research projects in equities, rates, credit, and hedge funds over the past two daces used by the largest institutional investors globally. His innovative work on Duration Times Spread (DTS) and the use of information from credit markets in systematic equity strategies was broadly adopted by portfolio managers and affected industry practices. He co-authored three books on quantitative investing in credit securities and published over a dozen articles in leading industry journals. He is a member of the Journal of Portfolio Management and Journal of Fixed Income editorial boards. Prior to Barclays, Dr. Ben Dor worked at Lehman Brothers and Morgan Stanley. He holds a PhD in Finance from the Kellogg Business School at Northwestern University, and completed both his B.A. and M.A. in Economics from Tel Aviv University, Cum Laude.