Is There A Replication Crisis In Finance?

Theis Ingerslev Jensen; Bryan T. Kelly; Lasse Heje Pedersen

doi:10.3386/w28432

Is There A Replication Crisis In Finance?

Theis Ingerslev Jensen, Bryan T. Kelly & Lasse Heje Pedersen

Working Paper 28432

DOI 10.3386/w28432

Issue Date February 2021

Several papers argue that financial economics faces a replication crisis because the majority of studies cannot be replicated or are the result of multiple testing of too many factors. We develop and estimate a Bayesian model of factor replication, which leads to different conclusions. The majority of asset pricing factors: (1) can be replicated, (2) can be clustered into 13 themes, the majority of which are significant parts of the tangency portfolio, (3) work out-of-sample in a new large data set covering 93 countries, and (4) have evidence that is strengthened (not weakened) by the large number of observed factors.

We are grateful for helpful comments from Nick Barberis, Andrea Frazzini, Cam Harvey, Antti Ilmanen, Ronen Israel, John Liew, Toby Moskowitz, Stefan Nagel, Scott Richardson, Anders Rønn-Nielsen, and seminar and conference participants at AQR, Georgetown Virtual Fintech Seminar, Tisvildeleje Summer Workshop 2020, Yale, and 2020 CFA Institute European Investment Conference. We thank Tyler Gwinn for excellent research assistance. Jensen and Pedersen gratefully acknowledge support from the FRIC Center for Financial Frictions (grant no. DNRF102). AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Bryan T. Kelly
I have received consulting income from AQR Capital Management exceeding $10,000 over the past three years. AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.
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Theis Ingerslev Jensen, Bryan T. Kelly, and Lasse Heje Pedersen, "Is There A Replication Crisis In Finance?," NBER Working Paper 28432 (2021), https://doi.org/10.3386/w28432.

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Is There A Replication Crisis In Finance?

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