Practical Significance of Statistical Significance

22 Pages Posted: 17 Aug 2017

See all articles by Ben Jacobsen

Ben Jacobsen

Tilburg University - TIAS School for Business and Society; Massey University

Alexander Molchanov

Massey University

Cherry Yi Zhang

Nottingham University Business School China; Massey University - School of Economics and Finance

Date Written: August 16, 2017

Abstract

Statistical significance is a core concept in many sciences to distinguish between what is and what is not. But what are the practical implications of finding a significant effect, and is it more reliable when based on more observations or higher confidence levels? We consider forecast accuracy in a practical setting using significant monthly deviations from the mean in a more than 300 year long time series of stock market returns. While statistical significance in general implies a marginal improved probability of correct forecasts, results vary strongly depending on significance levels and number of observations used. Surprisingly, signals based on higher significance levels or more observations do not necessarily imply better forecasts.

Keywords: Return predictability, January effect, forecasting

JEL Classification: G10

Suggested Citation

Jacobsen, Ben and Molchanov, Alexander and Zhang, Cherry Yi, Practical Significance of Statistical Significance (August 16, 2017). 30th Australasian Finance and Banking Conference 2017. Available at SSRN: https://ssrn.com/abstract=3020470

Ben Jacobsen

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Massey University ( email )

Auckland
New Zealand

Alexander Molchanov (Contact Author)

Massey University ( email )

Auckland
New Zealand

Cherry Yi Zhang

Nottingham University Business School China ( email )

199 Taikang East Rd.
Ningbo, 315100
China

Massey University - School of Economics and Finance ( email )

New Zealand

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