The Factor Multiverse: The Role of Interest Rates in Factor Return Measurement

We study the equity factor zoo using a duration-matching return-decomposition approach that adjusts factor returns by subtracting returns on duration-matched government bond portfolios. By doing so, we remove the component of factor returns attributable to interest rate movements while preserving shocks to expected growth and risk premia observed in the data. Among commonly used factors, the value, investment, and profitability premia increase after duration matching, while the market and size premia decrease, over the post-1981 sample period. Furthermore, the effect of duration matching on mean factor returns depends importantly on the interest rate environment, consistent with our return decomposition framework. This paper was accepted by Kay Giesecke, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.08851 .