Type I and Type II Errors in Finance (Presentation Slides)

21 Pages Posted: 25 Jun 2018 Last revised: 14 Jun 2019

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; Abu Dhabi Investment Authority; True Positive Technologies

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

Suggested Citation

López de Prado, Marcos and López de Prado, Marcos, Type I and Type II Errors in Finance (Presentation Slides) (June 25, 2018). Available at SSRN: https://ssrn.com/abstract=3201981 or http://dx.doi.org/10.2139/ssrn.3201981

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

Abu Dhabi Investment Authority ( email )

211 Corniche Road
Abu Dhabi, Abu Dhabi PO Box3600
United Arab Emirates

HOME PAGE: http://www.adia.ae

True Positive Technologies ( email )

United States

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

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