Illegitimate Science: Why Most Empirical Discoveries in Finance Are Likely Wrong, and What Can Be Done About It (Presentation Slides)

15 Pages Posted: 27 Apr 2015 Last revised: 5 Jul 2015

Marcos Lopez de Prado

AQR Capital Management, LLC; Cornell University - Operations Research & Industrial Engineering; RCC - Harvard University

Date Written: April 25, 2015

Abstract

The proliferation of false discoveries is a pressing issue in Financial research. For a large enough number of trials on a given dataset, it is guaranteed that a model specification will be found to deliver sufficiently low p-values, even if the dataset is random.

Most academic papers and investment proposals do not report the number trials involved in a discovery. The implication is that most published empirical discoveries in Finance are likely to be false. This has severe implications, specially with regards to the peer-review process and the Backtesting of investment proposals.

We make several proposals on how to address these problems.

Keywords: Multiple testing, selection bias, backtest overfitting, p-values

JEL Classification: G0, G1, G2, G15, G24, E44

Suggested Citation

López de Prado, Marcos, Illegitimate Science: Why Most Empirical Discoveries in Finance Are Likely Wrong, and What Can Be Done About It (Presentation Slides) (April 25, 2015). Available at SSRN: https://ssrn.com/abstract=2599105 or http://dx.doi.org/10.2139/ssrn.2599105

Marcos López de Prado (Contact Author)

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

HOME PAGE: http://www.aqr.com

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.orie.cornell.edu

RCC - Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

HOME PAGE: http://www.rcc.harvard.edu

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