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Thousands of Alpha Tests
[The performance of hedge funds: Risk, return, and incentives]

Author

Listed:
  • Stefano Giglio
  • Yuan Liao
  • Dacheng Xiu
  • Wei Jiang

Abstract

Data snooping is a major concern in empirical asset pricing. We develop a new framework to rigorously perform multiple hypothesis testing in linear asset pricing models, while limiting the occurrence of false positive results typically associated with data snooping. By exploiting a variety of machine learning techniques, our multiple-testing procedure is robust to omitted factors and missing data. We also prove its asymptotic validity when the number of tests is large relative to the sample size, as in many finance applications. To improve the finite sample performance, we also provide a wild-bootstrap procedure for inference and prove its validity in this setting. Finally, we illustrate the empirical relevance in the context of hedge fund performance evaluation.

Suggested Citation

  • Stefano Giglio & Yuan Liao & Dacheng Xiu & Wei Jiang, 2021. "Thousands of Alpha Tests [The performance of hedge funds: Risk, return, and incentives]," The Review of Financial Studies, Society for Financial Studies, vol. 34(7), pages 3456-3496.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:7:p:3456-3496.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa111
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    Cited by:

    1. Guillaume Coqueret, 2023. "Forking paths in financial economics," Papers 2401.08606, arXiv.org.
    2. Constantinos Kardaras & Hyeng Keun Koo & Johannes Ruf, 2022. "Estimation of growth in fund models," Papers 2208.02573, arXiv.org.
    3. Huang, Haitao & Jiang, Lei & Leng, Xuan & Peng, Liang, 2023. "Bootstrap analysis of mutual fund performance," Journal of Econometrics, Elsevier, vol. 235(1), pages 239-255.
    4. Lee, Hsiu-Chuan & Lee, Yun-Huan & Nguyen, Cuong, 2023. "Tail comovements of implied volatility indices and global index futures returns predictability," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    5. Yu, Xiufan & Yao, Jiawei & Xue, Lingzhou, 2024. "Power enhancement for testing multi-factor asset pricing models via Fisher’s method," Journal of Econometrics, Elsevier, vol. 239(2).
    6. Francisco Peñaranda & Enrique Sentana, 2024. "Portfolio management with big data," Working Papers wp2024_2411, CEMFI.
    7. Li, Ang & Liu, Mark & Sheather, Simon, 2023. "Predicting stock splits using ensemble machine learning and SMOTE oversampling," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    8. Guanhao Feng & Stefano Giglio & Dacheng Xiu, 2020. "Taming the Factor Zoo: A Test of New Factors," Journal of Finance, American Finance Association, vol. 75(3), pages 1327-1370, June.
    9. Andrew Y. Chen, 2022. "Most claimed statistical findings in cross-sectional return predictability are likely true," Papers 2206.15365, arXiv.org, revised Sep 2024.
    10. Smith, Simon C., 2022. "Time-variation, multiple testing, and the factor zoo," International Review of Financial Analysis, Elsevier, vol. 84(C).
    11. Andrew Y. Chen, 2022. "Do t-Statistic Hurdles Need to be Raised?," Papers 2204.10275, arXiv.org, revised Apr 2024.
    12. Ai He & Guofu Zhou, 2023. "Diagnostics for asset pricing models," Financial Management, Financial Management Association International, vol. 52(4), pages 617-642, December.
    13. Hollstein, Fabian, 2022. "The world of anomalies: Smaller than we think?," Journal of International Money and Finance, Elsevier, vol. 129(C).
    14. Campbell R. Harvey & Yan Liu, 2020. "False (and Missed) Discoveries in Financial Economics," Journal of Finance, American Finance Association, vol. 75(5), pages 2503-2553, October.
    15. Pätäri, Eero & Ahmed, Sheraz & Luukka, Pasi & Yeomans, Julian Scott, 2023. "Can monthly-return rank order reveal a hidden dimension of momentum? The post-cost evidence from the U.S. stock markets," The North American Journal of Economics and Finance, Elsevier, vol. 65(C).
    16. Colak, Gonul & Fu, Mengchuan & Hasan, Iftekhar, 2022. "On modeling IPO failure risk," Economic Modelling, Elsevier, vol. 109(C).
    17. Nabil Bouamara & S'ebastien Laurent & Shuping Shi, 2023. "Sequential Cauchy Combination Test for Multiple Testing Problems with Financial Applications," Papers 2303.13406, arXiv.org, revised Jun 2023.
    18. Umar, Zaghum & Zaremba, Adam & Umutlu, Mehmet & Mercik, Aleksander, 2024. "Interaction effects in the cross-section of country and industry returns," Journal of Banking & Finance, Elsevier, vol. 165(C).
    19. Niels Joachim Gormsen & Eben Lazarus, 2023. "Duration‐Driven Returns," Journal of Finance, American Finance Association, vol. 78(3), pages 1393-1447, June.
    20. Ge, Shuyi & Li, Shaoran & Linton, Oliver, 2023. "News-implied linkages and local dependency in the equity market," Journal of Econometrics, Elsevier, vol. 235(2), pages 779-815.
    21. Campbell R. Harvey & Yan Liu, 2020. "False (and Missed) Discoveries in Financial Economics," Papers 2006.04269, arXiv.org.

    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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