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.
