Risk factor investing is being applied to all asset classes. The application to fixed income has changed how fixed income managers think about risk and how they build their portfolios. This move to risk factor investing links bonds and stock through common factor definition and measurement.
At some level, the risk factor approach is not significantly different from more traditional bond investing; however, using risk factors allows for codification and commonality of thinking about across asset classes.
There is a size effect associated with total debt outstanding which is a proxy liquidity effect. Value is tied to price variation such as option-adjusted spread. Momentum is based on past return behavior. A low volatility effect associated standard deviation, and an interest rate and liquidity effect.
The strong advantage of risk factor investing is that it can effectively characterize the risks faced with holding any bond.
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