Abstract

http://ssrn.com/abstract=2249314
 
 

Citations (6)



 


 



…and the Cross-Section of Expected Returns


Campbell R. Harvey


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

Yan Liu


Duke University

Heqing Zhu


Duke University - Fuqua School of Business

August 25, 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 publication bias. 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 today 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.

Our key results are summarized:

Number of Pages in PDF File: 100

Keywords: Risk factors, Multiple tests, Beta, HML, SMB, 3-factor model, Momentum, Volatility, Skewness, Idiosyncratic volatility, Liquidity, Bonferroni, Factor zoo

JEL Classification: G12, G14, G30, G00, C12, C20, B41

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Date posted: April 17, 2013 ; Last revised: August 26, 2014

Suggested Citation

Harvey, Campbell R. and Liu, Yan and Zhu, Heqing, …and the Cross-Section of Expected Returns (August 25, 2014). Available at SSRN: http://ssrn.com/abstract=2249314 or http://dx.doi.org/10.2139/ssrn.2249314

Contact Information

Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Yan Liu
Duke University ( email )
Durham, NC 27708-0120
United States
Heqing Zhu
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
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