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Investment styles and the multiple testing of cross-sectional stock return predictability

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  • Vincent, Kendro
  • Hsu, Yu-Chin
  • Lin, Hsiou-Wei

Abstract

The scheme of simultaneously testing many profitable strategies may conceal the hazard of data-snooping bias. However, certain portfolio returns are also more likely to exhibit codependency because of their same investment styles. Aiming at the phenomena of stock return anomalies, we consider two multiple testing approaches: one ignores the classification of portfolios and the other utilizes such information. The results based on grouped multiple testing suggest that the implied adjusted critical values for t-statistics may vary across investment styles, and several statistically significant portfolios may be unidentified under the pooled setup.

Suggested Citation

  • Vincent, Kendro & Hsu, Yu-Chin & Lin, Hsiou-Wei, 2021. "Investment styles and the multiple testing of cross-sectional stock return predictability," Journal of Financial Markets, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:finmar:v:56:y:2021:i:c:s1386418120300677
    DOI: 10.1016/j.finmar.2020.100598
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    More about this item

    Keywords

    Anomalies; Cross-section of stock returns; Data-snooping bias; Multiple testing; Selective inference;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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