False (and Missed) Discoveries in Financial Economics
Methodology
2020-06-09 v1 Econometrics
Abstract
Multiple testing plagues many important questions in finance such as fund and factor selection. We propose a new way to calibrate both Type I and Type II errors. Next, using a double-bootstrap method, we establish a t-statistic hurdle that is associated with a specific false discovery rate (e.g., 5%). We also establish a hurdle that is associated with a certain acceptable ratio of misses to false discoveries (Type II error scaled by Type I error), which effectively allows for differential costs of the two types of mistakes. Evaluating current methods, we find that they lack power to detect outperforming managers.
Keywords
Cite
@article{arxiv.2006.04269,
title = {False (and Missed) Discoveries in Financial Economics},
author = {Campbell R. Harvey and Yan Liu},
journal= {arXiv preprint arXiv:2006.04269},
year = {2020}
}