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arXiv · 2006.04269

False (and Missed) Discoveries in Financial Economics

Campbell R. Harvey·Yan Liu
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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.

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Campbell R. Harvey, Yan Liu. 2020-06-07. False (and Missed) Discoveries in Financial Economics. https://arxiv.org/abs/2006.04269

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