The Role of Interest Rates in Factor Discovery

Over the past several decades, economists and quantitative scientists found a very large number of asset pricing anomalies and published numerous research papers about their findings, and this is known in the financial jargon as “factor zoo.” However, one strong underlying force might drive the performance of many of those anomalies. What’s that force? The level and trend in the interest rates, as in almost all parts of the developed world, there was a long-term steady decline in rates and inflation for nearly 40 years. We use the past tense as it seems that the situation changed at the beginning of this year…

Van Binsbergen, Jules H. and Ma, Liang and Schwert, Michael (Sep 2022) touched on this subject and made a careful examination of both past factor research and found that a significant part of published papers and developed models are sometimes unknowingly exposed to fitting to low or even zero interest rates.

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