Finance Seminar: Professor Tarun Chordia
P-hacking: Evidence from two million trading strategies
We implement a data mining approach to generate about 2.1 million trading strategies. This large set of strategies serves as a laboratory to evaluate the seriousness of p-hacking and data snooping in finance. We apply multiple hypothesis testing techniques that account for cross-correlations in signals and returns to produce t-statistic thresholds that control the proportion of false discoveries. We find that the difference in rejections rates produced by single and multiple hypothesis testing is such that most rejections of the null of no outperformance under single hypothesis testing are likely false (i.e., we find a very high rate of type I errors). Combining statistical criteria with economic considerations, we find that a remarkably small number of strategies survive our thorough vetting procedure. Even these surviving strategies have no theoretical underpinnings. Overall, p-hacking is a serious problem and, correcting for it, outperforming trading strategies are rare.
Professor Tarun Chordia received his PhD in finance from the Anderson School, UCLA, in 1993. He was an Assistant Professor of Finance at the Owen Graduate School of Management, Vanderbilt University from 1993. He joined the Goizueta Business School at Emory University in 2000. Prior to his doctoral studies, he worked for Citibank as a relationship and credit manager in the Financial Institutions Group.
Professor Chordia’s research is grounded in both theory and empirical methods, and spans a diverse area of financial economics. He has received numerous awards for his research on empirical asset pricing and market microstructure. Professor Chordia has published extensively in the top finance journals, including Journal of Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis and the Review of Financial Studies. He is currently the managing editor of the Journal of Financial Markets and a past associate editor of Review of Financial Studies. He has been on the program committee for the American Finance Association meetings, European Finance Association meetings, FIRS Conference, Finance Down Under Conference, NBER Market Microstructure group, Stern Microstructure Conference, the Utah Winter Finance Conference and the Western Finance Association meetings, and is a referee for numerous journals.