. . . And the Cross-Section of Expected Returns

101 Pages Posted: 22 Oct 2014 Last revised: 8 Oct 2021

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Lucy Liu

Texas A&M University - Department of Marketing

Caroline Zhu

University of Oklahoma

Date Written: October 2014

Abstract

Hundreds of papers and hundreds of factors attempt to explain the cross-section of expected returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.g., a t-ratio greater than 2.0. However, what hurdle should be used for current research? Our paper introduces a multiple testing framework and provides a time series of historical significance cutoffs from the first empirical tests in 1967 to today. Our new method allows for correlation among the tests as well as missing data. We also project forward 20 years assuming the rate of factor production remains similar to the experience of the last few years. The estimation of our model suggests that a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings in financial economics are likely false.

Suggested Citation

Harvey, Campbell R. and Liu, Yan and Zhu, Caroline, . . . And the Cross-Section of Expected Returns (October 2014). NBER Working Paper No. w20592, Available at SSRN: https://ssrn.com/abstract=2513152

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Yan Liu

Texas A&M University - Department of Marketing ( email )

430 Wehner
College Station, TX 77843-4218
United States

Caroline Zhu

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

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