The Factor Multiverse: The Role of Interest Rates in Factor Return Measurement
71 Pages Posted: 28 Sep 2022 Last revised: 30 Jan 2024
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: Suggested Citation