The Factor Multiverse: The Role of Interest Rates in Factor Discovery
44 Pages Posted: 28 Sep 2022 Last revised: 11 Feb 2023
Date Written: September 27, 2022
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: Suggested Citation