Corporate fraud, inertia and market conditions in explaining the differences in the exchange characteristics of bonds in the Russian market

Abstract

Subject. This article deals with the empirical tests of asset pricing models with Russian bonds. Objectives. The article aims to analyze risk factor sensitivities for bond portfolios using asset pricing models with prominent factors and newly proposed risk factors, based on bond market fundamental anomalies, and identify term structure of factor loadings through hidden bond market states corresponding to business cycle stages. Methods. We used the Hidden Markov Model to recover the sequence of bond market states based on spread of ten-year minus three-month government bond yields. Results. The article provides evidence of the significant contribution of the newly proposed risk factors, corresponding with corporate fraud, and momentum factors to the explanatory power of asset pricing models for bond portfolios excess returns. Specifically, we find a strong idiosyncratic momentum effect in the cross-section of Russian bond returns and hence introduce a bond idiosyncratic return momentum factor. We introduce hidden bond market states based on spread of government bond yields and show that proposed market states are statistically and economically significant. We examine the state-dependent explanatory power of the risk factors for test portfolios. Conclusions. The study contributes to the risk estimation accuracy, and presents theoretical framework and empirical evidence of factor-based investing in fixed income instruments. Investors in the Russian bond market should account for bond exposure to the newly proposed risk factors in the risk-adjusted performance analysis of bond portfolios.