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Data-Snooping Biases in Tests of Financial Asset Pricing Models

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Listed author(s):
  • Lo, Andrew W
  • MacKinlay, A Craig

Abstract

Tests of financial asset pricing models may yield misleading inferences when properties of the data are used to construct the test statistics. In particular, such tests are often based on returns to portfolios of common stock, where portfolios are constructed by sorting on some empirically motivated characteristic of the securities such as market value of equity. Analytical calculations, Monte Carlo simulations, and two empirical examples show that the effects of this type of data snooping can be substantial. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 3 (1990)
Issue (Month): 3 ()
Pages: 431-467

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Handle: RePEc:oup:rfinst:v:3:y:1990:i:3:p:431-67
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  1. Chan, K C & Chen, Nai-Fu, 1988. " An Unconditional Asset-Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk," Journal of Finance, American Finance Association, vol. 43(2), pages 309-325, June.
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  15. Arne Sandström, 1987. "Asymptotic normality of linear functions of concomitants of order statistics," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 34(1), pages 129-142, December.
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