Limits to arbitrage, investor sentiment, and factor returns in international government bond markets

Zaremba, Adam and Szczygielski, Kuba (2019) Limits to arbitrage, investor sentiment, and factor returns in international government bond markets. Economic Research-Ekonomska Istraživanja, 32 (1). pp. 1727-1743. ISSN 1331-677X

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Official URL: https://doi.org/10.1080/1331677X.2019.1638286

Abstract

The perspective of behavioural finance is that anomalies in the cross-section of returns are driven by mispricing that arises from investor irrationality that cannot be easily arbitraged away. In this study, we examine the implications of this for international government bond markets. Using data for 25 countries for the years 1992–2015, we replicate multiple factor strategies that represent four major return drivers: defensive (low-risk), carry, value and momentum. We investigate the relationships between the performance of these strategies and market-wide measures of limits to arbitrage and investor sentiment. We find that the defensive strategy performs best during tight arbitrage conditions whereas severe limits to arbitrage negatively affect momentum profits.

Item Type: Article
Uncontrolled Keywords: international markets, government bonds, anomalies, limits to arbitrage, investor sentiment, return predictability
Subjects: L100 Economics
N100 Business studies
N300 Finance
Department: Faculties > Business and Law > Newcastle Business School
Depositing User: Elena Carlaw
Date Deposited: 23 Jun 2020 09:58
Last Modified: 23 Jun 2020 10:00
URI: http://nrl.northumbria.ac.uk/id/eprint/43550

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