TY  - JOUR
AU  - Lo,Andrew W.
AU  - MacKinlay,A. Craig
TI  - Data-Snooping Biases in Tests of Financial Asset Pricing Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3001
PY  - 1991
Y2  - March 1991
UR  - http://www.nber.org/papers/w3001
L1  - http://www.nber.org/papers/w3001.pdf
N1  - Author contact info:
Andrew W. Lo
MIT Sloan School of Management
100 Main Street, E62-618
Cambridge, MA  02142
Tel: 617/253-0920
Fax: 781/891-9783
E-Mail: alo@mit.edu

A. Craig MacKinlay
Department of Finance, Wharton School
University of Pennsylvania, Steinberg-Dietrich Hal
3620 Locust Walk
Philadelphia, PA  19104-6367
Tel: 215/898-5309
Fax: 215/898-6200
E-Mail: MACKINLAY@WHARTON.UPENN.EDU
M2  - featured in NBER digest on 1988-11-01
AB  - We 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.
ER  -