Type I and Type II Errors in Finance (Presentation Slides)
21 Pages Posted: 25 Jun 2018 Last revised: 14 Jun 2019
Date Written: June 25, 2018
Full paper is available at: https://ssrn.com/abstract=3193697
Most papers in the financial literature control for Type I errors (false positive rate), while ignoring Type II errors (false negative rate). This is a mistake, because a low Type I error can only be achieved at the cost of a high Type II error.
In this presentation we derive analytical expressions for both, after correcting for Non-Normality, Sample Length and Multiple Testing.
Keywords: True positive, false positive, power, significance, recall, multiple testing, non-Normal returns, clustering, machine learning
JEL Classification: G0, G1, G2, G15, G24, E44
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