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

39 Pages Posted: 28 Sep 2022 Last revised: 18 Nov 2022

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

University of Pennsylvania - The Wharton School

Date Written: September 27, 2022

Abstract

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

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

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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