The Future of Empirical Finance

Journal of Portfolio Management, 41(4), Summer 2015

12 Pages Posted: 20 May 2019 Last revised: 30 May 2019

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; True Positive Technologies

Date Written: May 31, 2015

Abstract

Empirical Finance is in crisis: Our most important discovery tool is historical simulation, and yet, most backtests and time series analyses published in journals are flawed. The problem is well-known to professional organizations of Statisticians and Mathematicians, who have publicly criticized the misuse of mathematical tools among Finance researchers. In this note I point to three problems and propose four practical solutions. In an attempt to overcome the challenges posed by multiple testing and selection bias, I emphasize the need to move from an individual-centric to a community-driven research paradigm. Low retraction rates can be corrected through technologies that derive “peer p-values”. Stronger theoretical foundations and closer ties with financial firms would help prevent false discoveries.

Keywords: Empirical research, false discovery, multiple testing, physics envy

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

Suggested Citation

López de Prado, Marcos, The Future of Empirical Finance (May 31, 2015). Journal of Portfolio Management, 41(4), Summer 2015. Available at SSRN: https://ssrn.com/abstract=2609734 or http://dx.doi.org/10.2139/ssrn.2609734

Marcos López de Prado (Contact Author)

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States

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

True Positive Technologies ( email )

NY
United States

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

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