IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v3y1990i3p431-67.html
   My bibliography  Save this article

Data-Snooping Biases in Tests of Financial Asset Pricing Models

Author

Listed:
  • 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.

Suggested Citation

  • Lo, Andrew W & MacKinlay, A Craig, 1990. "Data-Snooping Biases in Tests of Financial Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 431-467.
    • Handle: RePEc:oup:rfinst:v:3:y:1990:i:3:p:431-67
    as

    Download full text from publisher

    File URL: http://www.jstor.org/fcgi-bin/jstor/listjournal.fcg/08939454
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    2. Josef Lakonishok, Seymour Smidt, 1988. "Are Seasonal Anomalies Real? A Ninety-Year Perspective," Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 403-425.
    3. Huberman, Gur & Kandel, Shmuel & Stambaugh, Robert F, 1987. " Mimicking Portfolios and Exact Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 42(1), pages 1-9, March.
    4. Huberman, Gur & Kandel, Shmuel, 1987. " Mean-Variance Spanning," Journal of Finance, American Finance Association, vol. 42(4), pages 873-888, September.
    5. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
    6. Shanken, Jay, 1985. "Multivariate tests of the zero-beta CAPM," Journal of Financial Economics, Elsevier, vol. 14(3), pages 327-348, September.
    7. Kandel, Shmuel & Stambaugh, Robert F., 1987. "On correlations and inferences about mean-variance efficiency," Journal of Financial Economics, Elsevier, vol. 18(1), pages 61-90, March.
    8. Lehmann, Bruce N. & Modest, David M., 1988. "The empirical foundations of the arbitrage pricing theory," Journal of Financial Economics, Elsevier, vol. 21(2), pages 213-254, September.
    9. 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.
    10. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    11. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    12. MacKinlay, A. Craig, 1987. "On multivariate tests of the CAPM," Journal of Financial Economics, Elsevier, vol. 18(2), pages 341-371, June.
    13. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    14. Gibbons, Michael R., 1982. "Multivariate tests of financial models : A new approach," Journal of Financial Economics, Elsevier, vol. 10(1), pages 3-27, March.
    15. Blume, Marshall E, 1970. "Portfolio Theory: A Step Toward Its Practical Application," The Journal of Business, University of Chicago Press, vol. 43(2), pages 152-173, April.
    16. Chamberlain, Gary, 1983. "Funds, Factors, and Diversification in Arbitrage Pricing Models," Econometrica, Econometric Society, vol. 51(5), pages 1305-1323, September.
    17. Connor, Gregory & Korajczyk, Robert A., 1988. "Risk and return in an equilibrium APT : Application of a new test methodology," Journal of Financial Economics, Elsevier, vol. 21(2), pages 255-289, September.
    18. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    19. Merton, Robert C., 1985. "On the current state of the stock market rationality hypothesis," Working papers 1717-85., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    20. Brown, Philip & Kleidon, Allan W. & Marsh, Terry A., 1983. "New evidence on the nature of size-related anomalies in stock prices," Journal of Financial Economics, Elsevier, vol. 12(1), pages 33-56, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:3:y:1990:i:3:p:431-67. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press). General contact details of provider: http://edirc.repec.org/data/sfsssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.