skip to main content
Caltech

Finance Seminar: Tarun Chordia, Emory University

Thursday, November 16, 2017
4:00pm to 5:00pm
Add to Cal
Baxter B125
p-hacking: Evidence from two million trading strategies
Tarun Chordia, Professor of Finance, Goizueta Business School, Emory University,

Abstract: We implement a data mining approach to generate about 2.1 million trading strategies. This large set of strategies serves as a laboratory to evaluate the seriousness of p-hacking and data snooping in finance. We apply multiple hypothesis testing techniques that account for cross-correlations in signals and returns to produce t-statistic thresholds that control the proportion of false discoveries. We find that the difference in rejections rates produced by single and multiple hypothesis testing is such that most rejections of the null of no outperformance under single hypothesis testing are likely false (i.e., we find a very high rate of type I errors). Combining statistical criteria with economic considerations, we find that a remarkably small number of strategies survive our thorough vetting procedure. Even these surviving strategies have no theoretical underpinnings. Overall, p-hacking is a serious problem and, correcting for it, outperforming trading strategies are rare.

Finance Seminars at Caltech are funded through the generous support of The Ronald and Maxine Linde Institute of Economic and Management Sciences (lindeinstitute.caltech.edu) and Stephen A. Ross.

For more information, please contact Sabrina De Jaegher by phone at 626-395-4228 or by email at [email protected].