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.

Our mission here at Quantpedia is to provide both retail and institutional investors with ideas for trading strategies that are easily understandable while based on and backed by quantitative academic research. Today, we present you with the results from a study that we came across. Although it’s not quantitative, but qualitative, it has really held our interest. The paper does not provide any images or figures; it is a study made from various types of surveys with answers from professionals concluded with an attention-grabbing summary table. 

Quantpedia has already covered a countless number of factor investing strategies and articles, from strategies in our Screener to multiple blog posts. Therefore, we can confidently say that we do like factor investing. However, there is always new research with a unique point of view. For example, we recently found a paper focused on the decay of the factor exposures of equity factor strategies. The study examines five factors: Value, Momentum, Quality, Investment, and Low Volatility, across 12 developed and emerging markets over a 20-year period. This research aims to find out how long it takes for a factor to decay after the portfolio is assembled. In other words, how often should the portfolio be rebalanced?