Integrating ESG in factor-based investing in sovereign bond markets: a low-volatility approach

Abstract

The group report analyses the joint impact of Momentum, Value, Size, and Low-Volatility in factor-based investing in sovereign bond emerging and developed markets, develops an ESG factor and assesses its effect across all strategies. This paper focuses on a low-volatility strategy, with volatility being measured as the standard deviation of the yield-to-maturity, and finds that controlling for credit risk and interest rate risk is fundamental to apply it. Results show that the integration of the ESG factor complements the low-volatility strategy and produces higher risk-adjusted returns.