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

Adam Zaremba*, Jan Jakub Szczygielski

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)
8 Downloads (Pure)

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.

Original languageEnglish
Pages (from-to)1727-1743
Number of pages17
JournalEconomic Research-Ekonomska Istrazivanja
Volume32
Issue number1
Early online date23 Jul 2019
DOIs
Publication statusPublished - 2019
Externally publishedYes

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