Original scientific paper
https://doi.org/10.1080/1331677X.2019.1638286
Limits to arbitrage, investor sentiment, and factor returns in international government bond markets
Adam Zaremba
; Dubai Business School, University of Dubai, Academic city, Dubai, UAE; Department of Investment and Capital Markets, Poznan University of Economics and Business, Poznan, Poland
Jan Jakub Szczygielski
; Department of Financial Management, University of Pretoria, Hatfield, South Africa
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
Keywords
international markets; government bonds; anomalies; limits to arbitrage; investor sentiment; return predictability
Hrčak ID:
228846
URI
Publication date:
22.1.2019.
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