The rising popularity of index‐replicating Exchange Traded Funds (ETFs) reflects the broader shift toward passive investing. However, the DAX 40 index incorporates an active component through inclusions and deletions, which affect investor returns. While the short‐term “index inclusion effect” around announcement and inclusion dates is well‐documented, we focus on long‐term post‐rebalancing dynamics. We show that newly included stocks between 2010 and 2023 outperformed the DAX 40 by an average of 33.2% during the 12 months before inclusion but underperformed an average of 36.1% over the subsequent 24 months. This mean reversion can be leveraged via a market‐neutral strategy that shorts newly included stocks on the inclusion date and pairs this with a long DAX ETF position. Maintaining the short for 18 months generates a statistically significant alpha relative to a Fama–French six‐factor asset pricing model, even after accounting for transaction costs. Our study reveals a hidden performance drag in the DAX 40 index, with important implications for passive investors in the index.

In this article, we empirically analyze European Collateralized Loan Obligations (CLOs) in the aftermath of the financial crisis. As Regulation introduced the so-called risk retention rule, originally designed to align interests between issuers and investors, we analyze the implications and effects of the risk retention rule on managed cash CLOs (arbitrage deals). Although the market suffered severely during the period after the rule was introduced, an alignment of interests between issuers and investors does not necessarily seem to have been attained. Here, we examine the implications of risk retention on asset pricing and find that CLO manager experience, credit rating and issuance amount are important factors that significantly influence pricing expectations of CLO investors. However, the form in which the CLO manager retains the risk does not seem to play a role.

Factor investing has become very popular during the last decades, especially with respect to equity markets. After extending Fama–French factors to corporate bond markets, recent research more often concentrates on the government bond space and reveals that there is indeed clear empirical evidence for the existence of significant government bond factors. Voices that state the opposite refer to outdated data samples. By the documentation of rather homogeneous recent empirical evidence, this review underlines the attractiveness of more sophisticated investment approaches, which are well established in equity and even in corporate bond markets, to the segment of government bonds.

Factor investing has become very popular during the last decades, especially with respect to equity markets. After extending Fama–French factors to corporate bond markets, recent research more often concentrates on the government bond space and reveals that there is indeed clear empirical evidence for the existence of significant government bond factors. Voices that state the opposite refer to outdated data samples. By the documentation of rather homogeneous recent empirical evidence, this review underlines the attractiveness of more sophisticated investment approaches, which are well established in equity and even in corporate bond markets, to the segment of government bonds.

The explanatory power of size, value, profitability, and investment has been extensively studied for equity markets. Yet, the relevance of these factors in global credit markets is less explored, although equities and bonds should be related according to structural credit risk models. In this article, the authors investigate the impact of the four Fama–French factors in the US and European credit space. Although all factors exhibit economically and statistically significant excess returns in the US high-yield market, the authors find mixed evidence for US and European investment-grade markets. Nevertheless, they show that investable multifactor portfolios outperform the corresponding corporate bond benchmarks on a risk-adjusted basis. Finally, their results highlight the impact of company-level characteristics on the joint return dynamics of equities and corporate bonds.

This article presents an improved equity momentum measure for corporate bonds, using the euro-denominated global investment-grade corporate bond market from 2000 to 2016. The author documents economically meaningful and statistically significant corporate bond return predictability. In contrast to the widely used total equity return, momentum as measured by the residual (idiosyncratic) equity return appears to further enhance risk-adjusted performance of corporate bond investors. Additional support for this conjecture is obtained from tests for various asset pricing factors and transaction costs, as exposure to these risk factors cannot explain this abnormal pattern in returns.

The low beta anomaly is well documented for equity markets. However, the existence of such a factor in corporate bond markets is less explored. I find that European corporate bonds of firms with a low equity beta have higher risk-adjusted returns, on average, than European corporate bonds of firms with a high equity beta. The results are economically and statistically significant as low beta credit portfolios improve the Sharpe ratio up to 30%. Moreover, even after accounting for transaction costs and by considering long-only portfolios, the risk-adjusted return remains substantial indicating practical implementability of the strategy for corporate bond investors.

Over the past 50 years financial asset pricing theories have evolved from simple single-factor models to more complex multi-factor models. Initially, Sharpe’s (1964) Capital Asset Pricing Model (CAPM) postulated that security markets can be described by a single factor (market beta). The basic premise of the model is that market participants require a risk premium for investing in high-beta assets that are typically considered more risky than low-beta assets. However, in the aftermath of the 2008 global financial crisis, two major trends emerged in the investment industry that laid the groundwork for the rise of factor-based investment strategies: 1) Investors started to evaluate and implement portfolio diversification in terms of underlying systematic risk factors given the failure of active management to provide adequate downside protection. 2) Investors demanded cost-effective, transparent and systematic alternative investment vehicles that could capture most or at least parts of active managers’ excess return. As a consequence, factor-based investing has grown in popularity and rapidly attracted academics, asset managers and institutional investors.