The Factor Multiverse: The Role of Interest Rates in Factor Discovery

44 Pages Posted: 28 Sep 2022 Last revised: 11 Feb 2023

See all articles by Jules H. van Binsbergen

Jules H. van Binsbergen

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Liang Ma

University of South Carolina - Darla Moore School of Business

Michael Schwert

AQR Arbitrage, LLC

Date Written: September 27, 2022

Abstract

We examine how the 40-year decline in interest rates impacted the discovery of asset pricing anomalies. We investigate 153 discovered anomalies and 1,395 potential undiscovered anomalies. We find that absent the decline in interest rates, the literature would likely entertain a different set of anomalies today. As the decline in interest rates is unlikely to reoccur, a reevaluation of relevant anomalies going forward is warranted. Accordingly, we use a duration-based interest rate adjustment to classify anomalies as robust, false positives, or false negatives. Our analysis highlights the sensitivity of the factor discovery process to this specific economic time period.

Keywords: anomalies, factor zoo, interest rates, false positives, false negatives

JEL Classification: G12, G14

Suggested Citation

van Binsbergen, Jules H. and Ma, Liang and Schwert, Michael, The Factor Multiverse: The Role of Interest Rates in Factor Discovery (September 27, 2022). Available at SSRN: https://ssrn.com/abstract=4231626 or http://dx.doi.org/10.2139/ssrn.4231626

Jules H. Van Binsbergen

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen

Liang Ma (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States
803-777-6366 (Phone)

HOME PAGE: http://sites.google.com/site/liangmaweb/

Michael Schwert

AQR Arbitrage, LLC ( email )

Two Greenwich Plaza
Greenwich, CT 06830
United States
2037423005 (Phone)

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