The Factor Multiverse: The Role of Interest Rates in Factor Return Measurement

71 Pages Posted: 28 Sep 2022 Last revised: 30 Jan 2024

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 study the equity factor zoo using an alternative excess return definition, which measures factor performance in excess of a duration-matched government bond portfolio and quantifies the realized return premium for investing in a stream of risky cash flows relative to a fixed cash flow counterfactual. We document different average excess returns than those previously reported. Among commonly used factors, the value, investment, and profitability premia become larger, while the market and size premia become smaller. Further, the effect varies with rising versus declining interest rate environments. Finally, we evaluate the sensitivity of factor discovery to the excess return definition.

Keywords: anomalies, factor zoo, duration, excess returns, interest rates

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 Return Measurement (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 )

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

Michael Schwert

AQR Arbitrage, LLC ( email )

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

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