The Factor Multiverse: The Role of Interest Rates in Factor Discovery
39 Pages Posted: 28 Sep 2022 Last revised: 18 Nov 2022
Date Written: September 27, 2022
We study the importance of the decline in interest rates in the discovery of asset pricing anomalies. We investigate 153 discovered anomalies as well as 1,395 potential undiscovered anomalies and find that absent the decline in interest rates, the asset pricing literature would likely entertain a different set of anomalies today. As the decline in interest rates is not continuing, a reevaluation of relevant anomalies going forward is warranted. To this end, we use a duration-based interest rate adjustment procedure to classify anomalies into false positives, false negatives, and those robust to the effect of interest rates. Our analysis highlights the sensitivity of the factor discovery process to this specific observed economic time period.
Keywords: anomalies, factor zoo, interest rates, false positives, false negatives
JEL Classification: G12, G14
Suggested Citation: Suggested Citation