Information Aggregation and P-hacking
55 Pages Posted: 20 Dec 2016 Last revised: 29 Aug 2018
Date Written: August 21, 2018
This paper studies the interplay between information aggregation and p-hacking in the context of predicting stock returns. The standard information aggregation techniques exacerbate p-hacking by increasing the probability of the type I error. We propose an aggregation technique, which is a simple modification of 3PRF/PLS, with an opposite property: the predictability tests applied to the combined predictor become more conservative in the presence of p-hacking. Using simulations, we quantify the advantages of our approach relative to the standard information aggregation techniques. We also apply our aggregation technique to three sets of return predictors proposed in the literature and find that the forecasting ability of combined predictors in two cases cannot be explained by p-hacking.
Keywords: predictability of returns, p-hacking, forecast combination, 3PRF, PLS
JEL Classification: G17, C58
Suggested Citation: Suggested Citation