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A Generalized Stepwise Procedure with Improved Power for Multiple Inequalities Testing

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  • Yu-Chin Hsu
  • Chung-Ming Kuan
  • Meng-Feng Yen

Abstract

We propose a stepwise test, Step-SPA(κ), for multiple inequalities testing. This test is analogous to the Step-SPA test of Hsu, Hsu, and Kuan (2010, J. Empirical Econ., 17, 471–484) but has asymptotic control of a generalized familywise error rate: the probability of at least κ false rejections. This test improves Step-RC(κ) of Romano and Wolf (2007, Ann. Stat., 35, 1378–1408) by avoiding the least favorable configuration used in Step-RC(κ). We show that the proposed Step-SPA(κ) test is consistent and more powerful than Step-RC(κ) under any power notion defined in Romano and Wolf (2005, Econometrica, 73, 1237–1282). An empirical study on Commodity Trading Advisor fund performance is then provided to illustrate the Step-SPA(κ) test. Finally, we extend Step-SPA(κ) to a procedure that asymptotically controls the false discovery proportion, the ratio of the number of false rejections over the number of total rejections, and show that it is more powerful than the corresponding procedure proposed by Romano and Wolf (2007, Ann. Stat., 35, 1378–1408).

Suggested Citation

  • Yu-Chin Hsu & Chung-Ming Kuan & Meng-Feng Yen, 2014. "A Generalized Stepwise Procedure with Improved Power for Multiple Inequalities Testing," Journal of Financial Econometrics, Oxford University Press, vol. 12(4), pages 730-755.
    • Handle: RePEc:oup:jfinec:v:12:y:2014:i:4:p:730-755.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbu014
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    1. Hassanniakalager, Arman & Sermpinis, Georgios & Stasinakis, Charalampos, 2021. "Trading the foreign exchange market with technical analysis and Bayesian Statistics," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 230-251.
    2. Chiang, Mi-Hsiu & Chiu, Hsin-Yu & Kuo, Wei-Yu, 2021. "Predictive ability of similarity-based futures trading strategies," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    3. Hsu, Po-Hsuan & Han, Qiheng & Wu, Wensheng & Cao, Zhiguang, 2018. "Asset allocation strategies, data snooping, and the 1 / N rule," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 257-269.
    4. Hubert Dichtl, 2020. "Investing in the S&P 500 index: Can anything beat the buy‐and‐hold strategy?," Review of Financial Economics, John Wiley & Sons, vol. 38(2), pages 352-378, April.
    5. Dichtl, Hubert & Drobetz, Wolfgang & Neuhierl, Andreas & Wendt, Viktoria-Sophie, 2021. "Data snooping in equity premium prediction," International Journal of Forecasting, Elsevier, vol. 37(1), pages 72-94.
    6. Hubert Dichtl & Wolfgang Drobetz & Viktoria‐Sophie Wendt, 2021. "How to build a factor portfolio: Does the allocation strategy matter?," European Financial Management, European Financial Management Association, vol. 27(1), pages 20-58, January.
    7. Minyou Fan & Youwei Li & Ming Liao & Jiadong Liu, 2022. "A reexamination of factor momentum: How strong is it?," The Financial Review, Eastern Finance Association, vol. 57(3), pages 585-615, August.
    8. Baur, Dirk G. & Dichtl, Hubert & Drobetz, Wolfgang & Wendt, Viktoria-Sophie, 2020. "Investing in gold – Market timing or buy-and-hold?," International Review of Financial Analysis, Elsevier, vol. 71(C).
    9. Vincent, Kendro & Hsu, Yu-Chin & Lin, Hsiou-Wei, 2021. "Investment styles and the multiple testing of cross-sectional stock return predictability," Journal of Financial Markets, Elsevier, vol. 56(C).
    10. Yu-Chin Hsu & Hsiou-Wei Lin & Kendro Vincent, 2017. "Do Cross-Sectional Stock Return Predictors Pass the Test without Data-Snooping Bias?," IEAS Working Paper : academic research 17-A003, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    11. Yang, Junmin & Cao, Zhiguang & Han, Qiheng & Wang, Qiyu, 2019. "Tactical asset allocation on technical trading rules and data snooping," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).

    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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