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Equity Factors Come and Go with Economic Regimes?

October 13, 2022 • Posted in Economic Indicators, Equity Premium

Are many accepted equity factors/return anomalies artifacts of the secular decline in interest rates during their discovery sample periods? In their September 2022 paper entitled “The Factor Multiverse: The Role of Interest Rates in Factor Discovery”, Jules van Binsbergen, Liang Ma and Michael Schwert study the role of the secular decline in interest rates since the early 1980s in the discovery of equity factors/return anomalies. They use value-weighted long-short portfolios and monthly reformation for all factors/anomalies. They apply duration-matched fixed income portfolio return adjustments to returns for each anomaly portfolio to model returns for the latter if there had been no interest rate decline. They then classify each anomaly as false positive (present for unadjusted returns, but not adjusted returns), false negative (present for adjusted returns, but not unadjusted returns) or robust to the effect of interest rates (present for both unadjusted and adjusted returns). Using monthly returns for 153 accepted factors/anomalies over respective original test periods and for 1,395 potential undiscovered factors/anomalies based on firm accounting variables during July 1962 through December 2020, along with contemporaneous yield data for zero coupon U.S. Treasury bonds and notes, they find that:

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