2020/06/07 by Campbell R. Harvey, Yan Liu, Harvey, Campbell R. +1
Economics, Econometrics and Finance · Mathematics · #Financial Markets and Investment Strategies #Statistical Methods in Clinical Trials #Sports Analytics and Performance
paper · pdf · doi:10.48550/arxiv.2006.04269
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.