01962cam a22002417 4500001000600000003000500006005001700011008004100028100001800069245012800087260006600215490004100281500001500322520099800337530006101335538007201396538003601468700002501504710004201529830007601571856003701647856003601684w3001NBER20141123025504.0141123s1989 mau||||fs|||| 000 0 eng d1 aLo, Andrew W.10aData-Snooping Biases in Tests of Financial Asset Pricing Modelsh[electronic resource] /cAndrew W. Lo, A. Craig MacKinlay. aCambridge, Mass.bNational Bureau of Economic Researchc1989.1 aNBER working paper seriesvno. w3001 aJune 1989.3 aWe investigate the extent to which tests of financial asset pricing models may be biased by using properties of the data to construct the test statistics. Specifically, we focus on tests using returns to portfolios of common stock where portfolios are constructed by sorting on some empirically motivated characteristic of the securities such as market value of equity. We present both analytical calculations and Monte Carlo simulations that show the effects of this type of data-snooping to be substantial. Even when the sorting characteristic is only marginally correlated with individual security statistics, 5 percent tests based on sorted portfolio returns may reject with probability one under the null hypothesis. This bias is shown to worsen as the number of securities increases given a fixed number of portfolios, and as the number of portfolios decreases given a fixed number of securities. We provide an empirical example that illustrates the practical relevance of these biases. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.1 aMacKinlay, A. Craig.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w3001.4 uhttp://www.nber.org/papers/w300141uhttp://dx.doi.org/10.3386/w3001